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PROBLEMS OF WAR AND OF RECONST^ 

EDITED BY 

FRANCIS G. WICKWARE 



WAR COSTS AND 
THEIR FINANCING 



PROBLEMS OF WAR 
AND OF RECONSTRUCTION 

Edited by 

Francis G. Wickware 

The Redemption of the Disabled 

By Garrard Harris, Research Division, Federal Board for 
Vocational Education. 

The Colleges in War Time and After 

By Parke Rexford Kolbe, President of the Municipal Uni- 
versity of Akron, Special Collaborator in the United States 
Bureau of Education. 

The American Air Service 

By Arthur Sweetser, Sometime Captain, Air Service, United 
States Army. 

Commercial Policy in War Time and After 

By William Smith Culbertson, Member of the United States 
Tariff Commission. 

Government Organization in War Time and After 

By William Franklin Willonghby, Director of the Institute for 
(jovernment Research. 

The Strategy of Minerals 

Edited by George Otis Smith, Direi ->r of the United States 
Geological burvcy. 

War Costs and Their Financing 

By Ernest L. Bogart, Professor of Economics in the University 
of Illinois. 



D. APPLETON AND COMPANY 
PUBLISHERS NEW YORK 



T225C 



PROBLEMS OF WAR AND OF RECONSTRUCTION 

\— 

WAR COSTS AND 
THEIR FINANCING 

A STUDY OF THE FINANCING OF THE WAR AND THE 
AFTER-WAR PROBLEMS OF DEBT AND TAXATION 

BY 

ERNEST LUDLOW BOGART 

PROFESSOR OF ECONOMICS IN THE UNIVERSITY OF 
ILLINOIS; SOMETIME ASSISTANT FOREIGN TRADE ADVISER 
IN THE UNITED STATES DEPARTMENT OF STATE 



WITH AN INTRODUCTION BY 

RUSSELL C. LEFFINGWELL 

SOMETIME ASSISTANT SECRETARY OF THE TREASURY 




D. APPLETON AND COMPANY 

NEW YORK LONDON 

1921 



■^1 



COPYRIGHT, 1921, BY 

D. APPLETON AND COMPANY 



PRINTED IX THE UNITED STATES OF AMERICA 



APR 26 1921 

g)CLA6i4313 



9C 



TO 

MY ASSOCIATES 
ON THE 

WAR TRADE BOARD 

AND IN THE 

DEPARTMENT OF STATE 



PREFACE 

The effort has been made in this volume to present in 
broad outline the salient features of war finance and 
some of the financial problems now confronting the 
United States and the leading nations of Europe. 
Although it is still too early to assess accurately the 
relative importance of various economic and financial 
measures and events, there is a certain gain in recording 
them while they are still fresh in mind. Many events 
were so extraordinary, and the measures taken to cope 
with them so unprecedented, that much time and study 
will be required finally to determine their part in the 
World War. But that they played an important role in 
determining the outcome of the struggle is clear. The 
^'silver bullets'' were equally decisive with those of lead 
or steel in deciding the victory. Never before were the 
differences between a good and a vicious theory of war 
finance so important and so far-reaching, for never 
before have war expenditures reached such stupendous 
figures. 

It had been hoped that the wide ramifications of inter- 
national credit and trade would constitute an effectual 
guarantee against war, but this hope was rudely dashed. 
Again, when war actually began, it was confidently pre- 
dicted that the financial exhaustion of the belligerents 
would bring it to an end after a few months, but events 
proved these prophecies also false. A constantly recur- 
rent problem throughout the whole war was the question 
as to whence came the enormous sums which were 
expended with such reckless prodigality. The important 
part played by the banks in financing the war, the enor- 
mous loans made by all the belligerents, the unprece- 

vii 



PREFACE 

dented inflation as a result of the increase in note issues 
and the subtler credit expansion, and the more limited 
resort to taxation, all presented problems of paramount 
interest and importance. These are discussed in the 
following pages. 

For us the most significant result of the war is the 
emergence of the United States as a creditor nation and 
its present dominating position in foreign trade and 
international finance. The changes in the movements of 
foreign trade, and in the commercial, industrial, and 
financial life of the United States,- are briefly described. 
The final chapters of the book present the problems of 
financial reconstruction — problems of inflated currency, 
of staggering debts, of crushing taxation — and of the 
measures taken by the leading belligerents to meet these 
problems. In conclusion, the cost of the war, so far as 
this is reducible to money values, is stated. 

With regard to the statistics of war finance a word of 
explanation is needed. For convenience foreign cur- 
rencies have been converted into dollars at pre-war rates 
of exchange, but in round numbers rather than in precise 
equivalents. Thus, the pound sterling ($4.8665) has 
been converted at $5; the ruble ($0.5146) and yen 
($0.4985), at 50 cents; the florin ($0,402), at 40 cents; 
the krona ($0,268) and mark ($0.2385), at 25 cents; the 
krone ($0.2022), the leu and leva ($0.1946), the 
drachma, lira, and franc ($0,193), at 20 cents. This has 
resulted in a slight overstatement in the case of some of 
the countries and a slighter understatement in the case 
of others, but as many of the figures are themselves still 
open to correction, it was thought that the convenience 
of this method more than offset the slight variations 
involved. 

In writing this book the author drew upon material 
used in the preparation of a companion statistical study, 
''The Direct and Indirect Costs of the Great World 

viii 



PEEFACE 

War ' * ; most of the tables and other statistical data incor- 
porated in Chapters IV, V, VI, and VIII of this volume 
have been drawn from that source. To the Carnegie 
Endowment of International Peace, by whom this study- 
was published, the author begs to make acknowledgment 
for their kindness in permitting the use of this copy- 
righted material. In other respects the present volume 
is an independent study. 

Friendly counsel and assistance have been received by 
the author from many quarters, but his obligations are 
so manifest in certain instances that he desires to make 
public acknowledgment thereof. To Miss Constance 
Agnes McHugh his indebtedness is especially great for 
her untiring and capable assistance in collecting and 
assembling the material, in preparing most of the tables, 
and in giving information and advice upon many points. 
Sincere thanks are also tendered Dr. Constantine E. 
McGuire for the onerous task of reading the manuscript 
and for many valuable suggestions. For errors which 
yet remain and for the views herein expressed on dis- 
putable points, the author alone must be held responsible. 

Ernest L. Bogart. 



CONTENTS 

PAGE 

PREFACE vii 

INTRODUCTION . XV 

CHAPTER I 

THE BASIS OF NATIONAL AND INTERNATIONAL CREDIT 

Industrial development furnishes a supply of capital — De- 
velopment of credit and financial institutions provide a 
money market — Political democracy creates a willingness 
to lend — The growth of public debts — Opportunity for 
profit in the exploitation of undeveloped countries — 
Investments in foreign countries — London an interna- 
tional money market and center of credit ... 1 

CHAPTER II 

FINANCIAL READJUSTMENTS AT THE OUTBREAK OP WAR 

Germany 's preparedness — The Entente Allies caught un- 
aware — Panic and temporary breakdown of credit — 
Eemedial measures — Safeguarding the gold reserves — 
Issue of additional money — Adjustment to war con- 
ditions 21 

CHAPTER III 

THE UNITED STATES AS A NEUTRAL 

Situation in the United States at the outbreak of the war in 
Europe — The expansion of foreign trade — How Europe 
paid its bills — The shipment of gold — Foreign loans 
placed in the United States — Purchase of American 
securities held abroad — Is New York to be the financial 
center of the world? ■ .... 54 

CHAPTER IV 

WAR EXPENDITURES 

The cost of past wars — Expenditures in the United States — 
Expenditures in Great Britain — Expenditures in France, 
Russia, and Italy — Expenditures in Germany and 
Austria-Hungary — Comparative estimate of total war 
expenditures 82 

xi 



CONTENTS 
CHAPTER V 

PAPER MOXEY AND BANK CREDIT 

Large use of banks in financing the war — Direct issues of 
paper money in Europe — Services of the Federal Reserve 
System in the United States — Treatment of gold . lO'i 



CHAPTER VI 

LOANS IN EUROPE 

General characteristics — British war loans — Use of loans in 
France, Russia, and Italy — The German theory of war 
finance — German banks and loan bureaus — Loans in 
Austria-Hungary, Bulgaria, and Turkey .... 146 



CHAPTER VII 

LOANS IN THE UNITED STATES 

War-finance program of the United States — The First Lib- 
erty Loan — The Second Liberty Loan — The Third Lib- 
erty Loan — The Fourth Liberty Loan — The Victory 
Liberty Loan — War savings and thrift stamps — Ad- 
vances to the Allies 199 



CHAPTER VIII 

TAXATION IN EUROPE 

Vigorous use of taxation in England — ■ Slight results in 
France, Russia, and Italy — Reasons therefor — In- 
adequacy of taxation by the Central Powers . . . 234 



CHAPTER IX 

TAXATION IN THE UNITED STATES 

A new era of Federal taxation — Revenue Act of October 3, 
1913 — Outbreak of the European War — Emergency 
Revenue Act of October 22, 1914 — Act of September 8, 
1 916 — The taxation of wealth — Act of March 3, 1917 — 
Declaration of war by the United States — War Revenue 
Act of October 3, 1917 — Income and excess-profits tax 
provisiona — Act of February 24, 1919 — Analysis of the 
measure 264 

xii 



CONTENTS 



CHAPTER X 

HOW SHOULD A WAR BE FINANCED? THE LESSON OF THE CIVTI. 

WAR 

The problem of financing the Civil War — Chase 's loan 
policy — Inadequacy of taxation — Issue of legal-tender 
notes — System of short term loans — Bond acts — Con- 
clusions — Financial management of the World War — 
Inability to meet current charges — Loans vs. taxes — 
Arguments for a loan policy — Disadvantages of heavy 
taxation — Arguments for a tax policy — Evils of exces- 
sive loans 297 

CHAPTER XI 

FINANCING EUROPE AFTER THE WAR 

Foreign trade of the United States as a belligerent — Exports 
and imports by regions — The balance of trade — 
Europe 's need for capital — Greatest supplies to be 
found in the United States — How can this be made 
available? — Machinery by v^-hich loans can be advanced 
to Europe — Proposals for the extension of short-time 
credit — Long-term credit — Conclusions . . . 326 

CHAPTER XII 

AFTER-WAR PROBLEMS OF CURRENCY AND DEBT 

Inflation of the currency a world phenomenon — Its effect on 
prices — Why should inflation have been permitted ? — 
The remedy for inflation — Difficulties — The distribution 
of gold — Financial situation of the principal countries — 
Comparison of wealth and debt — Can the burdens be car- 
ried? — American and European theories as to debt pay- 
ment — Problem of funding the floating debts — The 
capital levy — Problem of refunding — Will the debts 
be paid? 351 

CHAPTER XIII 

AFTER-WAR PROBLEMS OF TAXATION 

Economic strength of the leading nations — The financial 
outlook in the United States — The situation in Great 
Britain — The situation in France and Italy — Germany 's 
position — Proposed revenues of five leading nations — 
Probable development of principal taxes . . . 391 

xiii 



CONTENTS 
CHAPTER XIV 

THE COST OF THE WAR 

Who pays for a war ? — Material costs — Depletion of capi- 
tal — The burden on future generations — Direct and 
indirect costs — Immaterial costs — Diversity of losses — 
Some factors of advantage — Indefensibility of war . 413 





APPENDICES 




I. 


British Moratorium Proclamations 


. 423 


II. 


French Moratorium Decrees .... 


. 429 


in. 


Act Providing for German Loan Offices 


. 432 


IV. 


Liberty Bond Acts 


. 437 


V. 


Taxation in the United States 


. 473 


YI. 


Public Debt of the United States . 


. 489 


INDEX 


. 493 



INTRODUCTION 

One who attempts, so soon after the fact, to make a 
comprehensive survey of the financing of the World War 
by all the belligerents performs an important service, 
for he sets men's minds thinking about the war's lessons 
in finance and economics while they still have current 
interest. He necessarily labors, however, under great 
handicaps. Authoritative histories of the financing of 
the war in each of the countries involved remain to be 
written. Generally the policies adopted and the results 
are matters of record, but the reasons for their adoption 
remain to some extent to be disclosed. In the present 
volume Professor Bogart has performed a valuable 
service in bringing together in usable form some of the 
scattered data relating to war finance and in drawing 
such conclusions as seemed to him warranted by the evi- 
dence in hand. In the performance of this task he has 
displayed industry, discrimination, and breadth of view. 

On the continent of Europe generally, currency infla- 
tion moved hand in hand with the war itself, and the 
demands of Governments for the destructive business of 
war served to inflate prices. The peoples of the Con- 
linental countries had been staggering for generations 
under the burdens of an armed peace. They were perhaps 
in no condition, certainly in no mood, to submit to addi- 
tional taxation when called upon to engage in actual war. 
The price of physical preparedness, long maintained, 
was, for them, economic and financial unreadiness for a 
long war. The inflation stimulant was deemed necessary 
by their statesmen, and it was injected unsparingly and 
continuously. On the other hand, thanks to relative 
immunity from land attack, Great Britain and the 

XV 



INTRODUCTION 

United States, though they had maintained great navies, 
had escaped the greater economic drain of standing 
armies, and entered the war with resources relatively 
unimpaired. So in Great Britain currency inflation was 
strictly limited, and in the United States it was wholly 
avoided, as an instrument of war finance, and in these 
countries a vigorous effort was made to limit inflation of 
credit, a grave, though lesser, evil. Germany seems to 
have been enabled to conceal the effects of her inflation 
policy from her own people, almost to the end of the war, 
by the Allied blockade, which prevented the German 
people from making purchases abroad, and thus pre- 
vented the depreciation of the mark from being fully 
registered in foreign exchange, while price-fixing and 
rationing had a similar effect at home. It is an interest- 
ing speculation whether the blockade of Germany, which 
enforced *'war saving" on the German people, was more 
of a benefit than a detriment to Germany, whether her 
economic collapse was expedited or delayed by it. 

On the European continent then, inflation was accel- 
erated by unsound fiscal expedients, whereas in England 
and the United States it was retarded by relatively sound 
ones. But the disease spread by railroad and ship, by 
cable and wireless, to the uttermost parts of the earth, 
whithersoever war orders could be transmitted and gold 
or securities shipped, or credits established under the 
inducement of war profits. Its ravages seem to have 
been most severe in Japan, India, and other remote 
places, which assumed little, if any, of the war's financial 
burdens and enjoyed to the utmost its apparent benefits; 
just as in this country price inflation was more rapid 
before we entered the war and after the armistice than 
during the intervening period when we were engaged in 
actual warfare and war laws and regulations and the 
war spirit made it possible to impose a certain restraint. 

Certainly inflation could not have been avoided alto- 
xvi 



INTRODUCTION 

gether unless the war itself had been avoided, for it had 
its source in the war's waste of wealth. When the war 
ended, though the belligerent Governments had on hand 
considerable stocks of war supplies, ill adapted or not 
adapted at all for civilian use, and though there had been 
enormous increases in plant intended for making tools 
of war, stocks of goods for civilian use were very low, 
and the normal programme for the maintenance and 
extension of civilian plant and equipment, including 
railroads and housing, had been practically in abeyance 
for the whole war period. The world's working capital 
and its fixed capital had been reduced. , The world had 
been living bej^ond its income, living to some extent upon 
its accumulation of wealth. This would- have meant in- 
flation even if the whole cost of the war had been met 
from current taxes, for the money to pay taxes could 
only have been had by expanding credit to the extent that 
war expenditures exceeded the net income of the people.^ 

If it were possible, every expenditure of government 
in war and in peace should be met from current taxes. 
The notion that by borrowing the burden may be passed 
on to future generations is a delusion and a snare. It is 
true that by long borrowings future generations are 
burdened. The present cannot, however, escape the 
burden. Government expenditures for economically 
wasteful purposes create it. Government loans diffuse 
it, by absorbing capital and inflating credit, by increas- 
ing prices and interest rates. Thus the burden is shifted, 
not from one generation to another, but from the tax- 
payer to the community as a whole. Government debt is • 
always bad. When created for the purposes of war, it 
should be paid off as promptly as possible after peace. 
Burdensome as taxes may be, their burden is lighter 
while w^ar inflation lasts. Taxation for redemption of 
home debt is never really burdensome except as it is 
inequitably imposed. 

xvii 



INTRODUCTION 

But taxes should be paid from income. They cannot 
be paid without inflation from any other source. They 
should accordingly be imposed upon and assessed in pro- 
portion to income. If it were possible, they should be 
imposed upon available incomes, that is, upon the part of 
the income of the taxpayer not required with reasonable 
economy to support himself and his famil}^, or of the 
business man for the development of his business. But 
it is impracticable in tax law and administration to make 
these nice discriminations, and exemptions below a fixed 
minimum income and graduated surtaxes upon super- 
'' normal" incomes are but a crude effort in that direc- 
tion. When the tax gatherer takes more than the 
available income of a given taxpayer, the excess becomes 
in effect a capital tax and must be borrowed or pro^dded 
by the sale of capital assets. If the taxpaj^er happens not 
to have available property to an amount sufficient to pay 
his taxes and provide for the expansion of his business, 
his activities will be curtailed or put an end to. 

The difficulties and injustices involved in any system 
of taxation become more serious as tax rates increase; 
and when, as in the World War, the Government 's needs 
exceed the whole free income of the people, after pro- 
viding for operating and living expenses and the capital 
expenditures that are necessary to enable business to 
meet the demands for munitions and supplies thrown 
upon it by the war, then it is impossible to adopt any 
sj^stem of taxation that will fully meet the Government's 
needs and at the same time avoid inflation. In a war 
the Government should le^y taxes to as great an amount 
as it can without jeopardizing the productive business of 
the country, which is as essential to the successful con- 
duct of the war as fighting men themselves. 

For instance, if instead of asking $8,000,000,000 taxes 
for the fiscal year 1919, the Treasury of the United 
States had in June, 1918, asked $24,000,000,000, which 

xviii 



INTRODUCTION 

was the estimated amount of expenditures on a war 
basis, and if Congress had withstood the outcry and 
passed such a tax law, it is not difficult to guess that the 
consequence would have been a business catastrophe in 
this country which would have put us effectively out of 
the war. We should not have been able to spend the 
$24,000,000,000, because we should not have been able to 
find solvent business concerns to execute the Govern- 
ment's orders. Whether it would have been safe to go 
somewhat further than $8,000,000,000, it is, of course, 
impossible to say. One thing is clear, that if excessive 
taxes were imposed, the fact might not be known until 
efficiency was impaired and the harm done. In war 
time it would be impossible to repair the injury done by 
a tax levy which in fact was excessive. Panic, depres- 
sion, lowered efficiency, inactivity, will take place sooner 
or later as the result of a really serious error on the side 
of severity in taxation. If they take place in war time, 
the consequences may be irreparable. The consequences 
of moderate errors on the side of leniency in taxation, 
however, though very grave, are not irreparable. After 
a war is won, the people can, if they will, submit to 
taxation to an amount adequate to repair the error. 

The question is, however, largely academic. One 
hundred million people are not pawns in a game. They 
will have no better government and no better economics 
than they want, and even if they wanted and got the best, 
they could not escape the evil consequences of bad gov- 
ernment and bad economics rampant in the rest of the 
world. To illustrate again. Our Treasury's programme 
was to finance from current taxes at least one-third of 
our total expenditures, including loans to foreign Gov- 
ernments. The first War Revenue Act was supposed to 
carry $4,000,000,000 in taxes. It did not, however, 
become law until October 3, 1917, about six months after 
the declaration of war. A little more than six months 

xix 



INTRODUCTION 

later the Treasury demanded that the tax revenues be 
doubled, so as to produce $8,000,000,000. The leaders 
of both parties in Congress had agreed among themselves 
to adjourn in July, 1918, to enable members of Congress 
to mend their fences before election, and they protested 
vigorouslj^ against the Treasury's programme. Congres- 
sional leaders in the Administration party assured the 
Secretary of the Treasury, and the President himself, to 
whom they appealed, that persistence in the Treasury's 
programme would inevitably mean loss of the House of 
Representatives to the Administration party at the elec- 
tion in the following November. The Treasury never- 
theless did persist, the President sustained it, and the 
Administration lost not only the House, but the Senate 
as well. The $8,000,000,000 tax bill passed the House 
after a protracted delay, but the Senate did not act upon 
it until after the election and the armistice in Novem- 
ber, 1918, when, in the light of altered conditions, the 
Treasury modified its programme and asked for 
$6,000,000,000, instead of $8,000,000,000. The second 
War Revenue Act did not become law until February 24, 
1919, more than three months after the fighting stopped 
and about nine months after the Treasury had demanded 
the additional revenue. The Secretary of the Treasury 
and the President knowingly took their political lives in 
their hands in an effort to finance the war as largely 
as possible from current taxes, and in the issue lost them. 
It is inevitable, then, that the amounts collected in 
taxes fall far short of Governments' needs in such a war. 
The difference must be made up by loans. Those loans 
should be distributed as widely as possible among in- 
vestors. To the extent that Government expenditures 
are met from loans placed among investors, who pay for 
them out of income which would otherwise have been 
spent or invested in non-essential • enterprises, inflation 
may be ayoided for the time being. It was the multitude 

XX 



INTRODUCTION 

who financed the war. Whether with their savings the 
rich bought Groverument securities, was not very im- 
portant. To the extent that the rich do not own Govern- 
ment securities they invest in other securities. It was 
only the multitude who had a capacity of saving and 
making investments which they had never utilized. 

There are those who say that Governments should have 
paid the market rate for money throughout the war. The 
fact is that there was no market rate and there could be 
none. The supply of Government securities always 
exceeded the demand. Funds to meet this necessity 
could be had, not by marking down values of existing 
securities, but by seeking new savings, and these in turn 
were to be had by appeals, not to acquisitiveness, but to 
patriotism. The overwhelming necessities of the war 
dominated the situation; demand was unlimited, and 
supply very limited. Governments could not tolerate 
profiteering, under cover of the law of supply and 
demand, on the part of those possessed of goods, services, 
or credit, in the face of the dire necessity of the whole 
people. So they fixed the prices of commodities, con- 
trolled exports and imports and gave priority orders, 
took control of transportation on land and sea, restricted 
capital issues, restricted the export of gold and silver and 
controlled transactions in foreign exchange, sought per- 
sonal saving in food, fuel and money, and drafted the 
man power of the nations and sent it to war. And they 
fixed the price of credit too. 

But Government war expenditures put too much 
money into the pockets of people who were not accus- 
tomed to have it. They got it as an inducement to work 
as hard and fast and effectively as Governments asked 
them to do. /Instantly upon the signing of the armistice 
many persons^andoned the restraint to which they had 
subjected themselves during the period of active warfare 
and indulged themselves in idleness or half-hearted 

xxi 



INTRODUCTION 

labor and m loose expenditures. War wages, war profits, 
and war bonds represented just so mucli accumulated 
buying power in the bands, very largely, of those who 
were unaccustomed to have it. The war being over, we 
had to have our fling^and the fling being over, we have 
to take our medicine. ; 

Deflation of prices^seems to have started during the 
early months of 1920 with the Chinese boycott of 
Japanese goods for political reasons, which pricked the 
bubble of Japan's war prosperity. Price deflation had 
made great strides all over the world by the end of 1920, 
though inflation of currency and credit continued unre- 
strained on the European continent, and was not pre- 
vented, though it was retarded, in England and the 
United States by the dear-money policy adopted by the 
Bank of England in November, 1919, and the Federal 
Reserve Banks in January, 1920. 

In Europe after the armistice, while the resumption 
of business activity and production awaited assurance of 
peace and political stability, still unhappily withheld, 
millions of men were kept under arms and more or less 
desultory warfare continued. Governments kept them- 
selves in power by means of this military activity, by 
distributing food at less than cost, and by making unem- 
ployment allowances, which subsidized idleness, and paid 
the bills by printing currency because taxes and loans 
were unpopular. War necessity is the only, though per- 
haps sufficient, justification for the defiance of economic 
law. One of the greatest evils left by the war in its 
train was the habit of mind that looks to government to 
do all things and tolerates government practices that in 
times of peace are unsound, if not downright dishonest. 
Government expenditure is the root of all present 
economic and social evil. To allay domestic discontent 
by subsidies and doles from the public treasury involves 
the disturbance of social and economic laws for political 

xxii 



INTRODUCTION 

purposes. The issue of paper money to meet government 
expenditures is a form of surreptitious taxation, which 
imposes the burden of government expense most heavily 
upon those in the community least able to bear it and 
leads ultimately to bankruptcy. Embargoes upon the 
exportation of gold, persisted in in time of peace by all 
the countries of the world except the United States, pre- 
serve the basis for internal inflation and amount to the 
refusal of payment of international indebtedness. Em- 
bargoes on the importation of securities by the country 
of issue amount to their dishonor. Embargoes on the 
importation of goods, whether frankly so called or 
masquerading as proteciive tariffs, retard economic 
recovery and lay the basis for future wars. 

Europe has many overpopulated areas and has great 
populations, ordinarily employed in making finished 
products for export from imported materials, and fed in 
large part from imported foods. She cannot, therefore, 
have prosperous economic life until her currencies have 
a reasonably firm value in foreign exchange. It would 
be better if each of these currencies had a definite gold 
value, even if it were very much less than the pre-war 
gold value, than that European Governments should 
continue to print irredeemable paper to produce foreign 
exchange or current funds at home. We cannot have 
free and orderly international commerce without rather 
stable currencies all over the world. The inability of 
Great Britain and the European neutrals to resume 
specie payment grows doubtless out of their fear of being 
drained of their whole gold supply because their neigh- 
bors in Europe, to whom they must sell, cannot pay for 
what they buy. The problem, therefore, is to find what 
is necessary to give France, Italy, Belgium, and Central 
Europe sound currencies and to prepare them to resume 
specie payment. The war has burdened the continental 
Allies with very heavy debts to Great Britain and the 

xxiii 



INTRODUCTION 

United States, and Germany with heavy indemnity pay- 
ments to the Allies. It has deprived Europe of a large 
part of her ''invisible" exports. Obviously gold cannot 
be found to meet any balance by which the exports of 
any of these countries fall below the sum of their imports 
and such extraordinary war paj^ments. The European 
world has not gold enough for its own requirements as 
domestic reserve, let alone for any continuous or per- 
manent drain to meet foreign balances. Gold cannot be 
used to settle a continuing adverse foreign balance. It is 
only suitable to settle a seasonal or occasional balance 
except in a country which is itself a substantial producer 
of gold. Most of these countries require a certain 
amount of working capital from abroad to enable them 
to set their industries going at maximum efficiency. 

The reasonably prompt economic rehabilitation of 
Continental Europe can be had through (1) peace and 
disarmament; (2) freer trade and the open door; (3) 
balancing budgets, stopping the printing press, and 
resuming specie paj^ment both at home and in foreign 
exchange, currencies being revalued, if necessar}^, in 
terms of gold; (4) a composition with foreign govern- 
ment creditors, particularly Great Britain and the 
United States; and (5) capital issues (not merely bank 
credits) through private channels to provide working 
capital in foreign markets. America will be greatly the 
gainer when Europe, her best customer, recovers true 
buying power and her own speculatively inclined people 
no longer have to accept irredeemable currencies and 
credits in exchange for dollar values. America has 
ever^-thing to gain, and nothing to lose, by accepting the 
moral leadership imposed upon her by the war, and 
dealing constructively, even generously, with the eco- 
nomic problems of the European Allies. If she will not, 
she stands to lose the whole world as well as her own soul. 

R. C. Leffingwell. 



WAR COSTS AND 
THEIR FINANCING 



CHAPTEE I 

THE BASIS OF NATIONAL AND INTERNATIONAL CREDIT 

Industrial development furnishes a supply of capital — Develop- 
ment of credit and financial institutions provide a money- 
market — Political democracy creates a willingness to lend — - 
The growth of public debts — Opportunity for profit in- the 
exploitation of undeveloped countries — Investments in for- 
eign countries — London an international money market and 
center of credit. 

The World War which has ravaged Europe and set 
back by at least a generation the progress of the world 
is estimated to have cost in direct expenses of the Gov- 
ernments involved not less than $200,000,000,000. Most 
of this enormous sum was obtained by means of popular 
loans. It is evident that it was possible to wage war on 
the scale of the late struggle and with the highly per- 
fected technical appliances so lavishly employed in it, 
not merely because of the development of military 
strategy or of engineering and chemical science, but also 
because of the growth of the art and science of finance. 
Before the vast sums required could be obtained, a sys- 
tem of national credit must have been developed. In 
any discussion of w^ar costs the question at once presents 
itself as to where all the money came from to pay for 
the war, and how the Governments were able to persuade 
their peoples to place it at their disposal. This very 
statement of the problem suggests at least three funda- 
mental conditions for the development of national 
credit. There must be an adequate supply of disposable 
capital ; there must exist the mechanism and machinery 
for the collection and distribution of this capital; and, 

1 



WAR COSTS AND THEIR FINANCING 

finally, the lenders must have some adequate guarantee 
that it will be repaid. 

Modern industrial society is so thoroughly capitalistic 
that we often fail to realize how comparatively recent 
is the existence of capital in large amounts and its 
utilization for any desired purpose. During the period 
from the fourth to the sixteenth centuries most of the 
capital in the world was invested in agriculture. The 
discovery of the shorter route to India and of the New 
World called into existence a new category — com- 
mercial and mercantile capital. Proof of the existence 
of considerable amounts of free disposable capital in 
England ma}^ be found in the rapidity with which 
London was rebuilt after the great fire of 1666 and the 
large sums that were lost in the speculative manias, or 
''bubble" companies, of 1720. As a result of the 
excesses of the latter period corporate organization was 
repressed for almost a century. It was not until after 
the industrial revolution in England at the end of the 
eighteenth century that we can recognize industrial 
capital. Moreo^^er, down to the very beginning of the 
nineteenth century capital was almost entirely per- 
sonal — that is to say, the capitalist went with his 
capital. Almost every business was carried on wdth the 
merchant's or the manufacturer's own funds. If these 
were insufficient, the additional sum necessary was 
obtained by forming a partnership with a wealthy man. 
The nineteenth century, however, saw a tremendous 
growth in the formation of joint-stock companies and of 
corporations. 

The development of corporations with limited lia- 
bility of individual shareholders greatly stimulated the 
investment habit. Capital now became impersonal : it 
could be invested in enterprises without the necessity 

2 



NATIONAL AND INTERNATIONAL CREDIT 

of managing or supervising its use. Hitherto the 
national debt had afforded almost the only investment 
of this character, and as a consequence the rate of 
interest on Government bonds was extremely low; the 
subsequent fall in the price of Consols was the result, 
not of an impairment of the national credit of Great 
Britain, but rather of the multiplication of other safe 
forms of investment. The development of manu- 
factures, of mining, and of railroad and water trans- 
portation offered attractive and productive fields of 
investment, and the growth of capital went on apace 
during the nineteenth century. An illustration of the 
amazing expansion which occurred within a century 
may be found in the growth of the value of manu- 
factures in the principal industrial countries of the 
world between 1780 and 1888. This is shown in the 
following table :^ 



Value of Manufactures in Various Countries, 1780-1888 
{In millions) 



Country 



1780 



1800 



1820 



1840 



1860 



1888 



United Kingdom. 

France 

Germany 

Russia 

Austria 

Italy 

Spain 

Belgium 

United States. . . , 
Various 



Total. 



$885 

235 

250 

50 

150 

50 

50 



$1,150 
950 
300 

75 
250 

75 
100 



$1,450 
1,100 
425 
100 
900 
125 
130 



75 
155 



125 
225 



275 
300 



$1,935 
1,320 
750 
200 
710 
200 
225 
300 
480 
450 



$2,885 

1,900 

1,550 

775 

1,000 

400 

300 

450 

1,960 

800 



$4,100 

2,425 

2,915 

1,815 

1,265 

605 

425 

510 

7,215 

1,815 



$2,400 



$3,250 



$4,305 



$6,570 



$12,020 



$23,090 



^Based on M. Gr. Mulhall, Dictionary of Statistics (London 
1802), p. 365. 

3. 



WAR COSTS AND THEIR FINANCING 

The explanation of tlie enormous growth in manu- 
facturing capacity is to be found primarily in the use 
of non-human power. A new era in human history was 
introduced with the invention of the steam engine. 
Before that event production was limited by the number 
of human hands available; afterwards the only limit 
was man's ingenuity in fashioning new machines to do 
his work. The last thirty years has seen an increase 
in the mastery of man over nature greater than that of 
any similar preceding period. Electricity and motor 
fuels have supplemented and in some cases supplanted 
the work of steam and have vastly increased production. 
Science has been called to the assistance of industry, 
and has not only increased output, but has improved 
quality and reduced cost. Industry has come more and 
more to be carried on by the use of capital and less by 
the direct application of human muscle. The vast 
increase which has taken place throughout the world 
in capital available for productive enterprises may be 
gauged by the statistics of the growth of wealth in the 
United Kingdom, France, and the United States shown 
on the following page. 

Before national credit can be developed, however, 
there must exist in the community not merely a fund of 
disposable capital, but a securities market in which this 
capital can be disposed of must also have been created. 
Credit and financial institutions, banks, stock exchanges, 
brokers, credit instruments, commercial law, and other 
financial appliances of a highly de\^loped industrial 
people are essential to the proper functioning of the 
economic machine known as modern industry. Banks 
are essential first of all as agencies for collecting the 
small savings of the people, massing them into larger 
sums and placing these at the disposal of industrial 

4 



NATIONAL AND INTERNATIONAL CREDIT 



Value of Property in the United Kingdom, France, and the 
United States 



{In millions) 



Year 



VALUE OF property 



Total Per capita 



United Kingdom . 



France , 



United States . 



1822 
1845 
1865 
1890 
1910 

1853 
1878 
1886 
1910 

1850 
1870 
1890 
1910 



$12,500 
20,000 
30,000 
50,000 
72,500 

25,000 
35,000 
40,000 
59,000 

7,135 
30,068 
65,037 

187,739* 



$600 

715 

1,000 

1,350 

1,560 

700 

930 

1,050 

1,475 

308 

780 

1,036 

2,040 



* Estimate of Census Bureau, 1912. 



enterprise. Before it can be used, capital must first of 
all be produced, and then it must be saved and made 
available for use in further production. But .the modern 
commercial bank does more than this. It transfers the 
control of industry and of labor to the possessor of 
credit; in other words, it provides the mechanism and 
machinery by which the capital of the community is 
brought under the direction of those who can presum- 
ably make the best economic, or possibly social, use of 
it, who can at least pay the best rate of interest, all 
things considered. 

If capital is a new phenomenon, banks are still more 

5 



WAR COSTS AND THEIR FINANCING 

recent. Modern banking may be said to date from the 
Florentine banks of the thirteenth and fourteenth cen- 
turies, although the first bank of record, the Bank of 
Venice, was established in 1171. The seventeenth cen- 
tury saw the establishment of banks in Amsterdam 
(1609), Hamburg (1619), Sweden (1688), and England 
(1691). Not until 1800 was the Bank of France estab- 
lished and the great central institutions of Germany, 
Italy, Russia and other countries were organized at still 
later dates. The earlier institutions were banks of de- 
posit only, until the Bank of Sweden, in 1790, for the 
first time issued bank notes. Deposit banking in the 
modern sense is a development of the nineteenth cen- 
tury; it was not until after 1814 that deposit banking 
and the use of checks took on large dimensions in 
England, and in other countries its development was 
much later. But the growth of deposit banking was 
important, not merely in providing a market for capital, 
but also in stimulating the investment habit. 

Still more recent in development has been the growth 
of stock and produce exchanges. This was an evolution 
of modern business, the stock exchange being a product 
of the eighteenth century, and the produce and cotton 
exchanges, of the nineteenth century. The system of 
option trading was only developed during the latter half 
of the nineteenth century. The oldest of the modern 
exchanges, the Paris Bourse, dates from 1726; the 
London Stock Exchange dates from 1773, and the New 
York Stock Exchange was not founded until 1817. 
With the creation of these exchanges and of credit insti- 
tutions it became possible to trade in the evidences of 
debts of governments and of private corporations; in 
other words, a securities market was established. 

It is scarcely necessary to establish the fact of a 

6 



NATIONAL AND INTERNATIONAL CREDIT 

demand for capital in tlie modern industrial state, on 
the part either of private borrowers or of the State 
itself. The extent of such a public demand is sufficiently 
ev^idenced by the growtli of public debts. Here the 
interesting question arises: What forces operate to 
induce owners of capital to lend it to States or Govern- 
ments? The answer to this question is political rather 
than economic, and is found in the existence of some 
adequate security to the lender that the sum borrowed 
will be returned. As a sovereign State may repudiate 
its obligations at its pleasure and cannot be sued or 
have judgment entered against it, such a guarantee 
would seem especially difficult to obtain. But in fact 
the strongest sort of security exists in the control of 
Government by the propertied class. " It follows from 
this," writes Professor Adams,^ " that when property 
owners lend to the Government, they lend to a corpora- 
tion controlled by themselves." As they are not likely 
to repudiate a debt that is owed to themselves, a public 
debt really rests upon the strongest sort of security. 

Public borrowing has therefore accompanied the 
growth of constitutional government; it has had its 
greatest development since 1848, when constitutionalism 
became predominant in Europe. Above all else is 
needed the guarantee of a stable and honest Government. 
The mere forms of constitutionalism will not alone main- 
tain the credit of a State, as witness the experience of 
many a Latin- American republic. On the other hand, 
there can be no stronger guarantee than that given 
by a Government resting upon the constitutionally 
expressed consent of the governed. Political democracy 
creates a willingness to lend by affording a guarantee 
against repudiation. 

^ Henry C. Adams, Public Debts, p. 9. 

7 



WAR COSTS AND THEIR FINANCING 

The existence of a fund of loanable capital, of a 
money market, and of an adequate security against loss 
constitutes, however, only the favoring conditions for 
the growth of public debts ; they do not explain the wil- 
lingness, nay, the eagerness, of modern States to borrow. 
The explanation of this universal characteristic may be 
found in two directions. In the first place, the modern 
State is an industrial State and is called upon to do 
many things for its citizens which they did not demand 
a hundred years ago. From street railways and sewers 
to public baths and vocational schools, the expenditures 
of Governments have increased so rapidly that they 
frequently find it easier to meet their outlays by bor- 
rowing than by resort to taxation. But far more 
important than loans for investment purposes or to meet 
casual deficits have been those contracted for war. 
Armament, or preparation for war, and the actual costs 
of war itself are responsible for most of the indebted- 
ness which burdens the nations of to-day. The follow- 
ing table shows the growth of the aggregate public debts 
of the civilized governments of the world during the 
last half-century prior to the World War:^ 

Growth of Public Debts, 1848-1913 

1848 $7,627,692,215 

1860 10,399.341,688 

1870 17,117.640.428 

1880 27.421.037.643 

1890 27.524.976.915 

1908 36.548.455.489 

1912 42.000.000.000 

1913 42,940,000,000 

The larger increases shown in this table were the 
result of war or of preparation for war. The period 
between 1848 and 1860 was one of armament, marked 

' C. C. Plehn, Introduction to Piiblic Finance (3d edition), p. 
367. 

8 



NATIONAL AND INTERNATIONAL CREDIT 

by several small outbreaks like the Crimean War. 
Between 1860 and 1870 the American Civil War and the 
Prussian-Austrian War increased public debts by 
nearly 70 per cent. The following decade, within w^hich 
fell the Franco-Prussian War, saw the greatest increase 
of any period. The longer period from 1890 to 1908 
witnessed our own war with Spain, the Boer War, and 
the Russo-Japanese War. The four years 1908-1912 were 
years of preparation, of military and naval expansion, 
and of armament. The only period in this table that 
did not show a marked increase in the growth of debt 
(from 1880 to 1890) was the only one that was marked 
by general peace, although the rapid reduction of the 
Civil War debt in the United States during this period 
accounts in part for the smallness of the increase. 

But although war has been chiefly responsible for 
this huge burden of public debt, much of it has been 
incurred for the purpose of economic development, the 
other of the two objects for which financiers agree that 
a funded debt may properly be created. Between these 
two purposes there are many differences. A war debt 
is unproductive; it lessens rather than increases the 
debtor's ability to pay (leaving indemnities out of 
account) ; it usually becomes a permanent burden on 
the nation. An investment loan, on the other hand, is 
productive; it increases the efficiency of the borrower 
and creates the fund out of which the debt may be 
paid; finally, it is usually expunged within the life of 
the improvement. There is one other significant differ- 
ence between these tw^o kinds of debt: the war debt is 
usually a domestic debt, while that for "internal 
improvements," as they are designated in the United 
States, has generally been raised by means of foreign 
loans; in other words, wars may be financed by means 

9 



WAR COSTS AND THEIR FINANCING 

of national credit, but the internal development of 
young countries awaits the growth of international 
credit. 

The principles underlying the development of inter- 
national credit are essentially the same as those upon 
which national credit is based. A supply of capital must 
exist, not merely adequate for the industrial needs of 
the lending country but sufficient also for export; in 
other words, there must be surplus capital. The machin- 
ery for the collection and distribution of this capital 
must now be international in scope ; there must be inter- 
national banks and trading companies, international 
shipping and insurance concerns, etc. Finally, sufficient 
guarantees must be given that the debts will be repaid. 
Here lies the most difficult problem of international 
borrowing, for attempts by the Governments of lenders 
to enforce payment from the borrowers have not infre- 
quently led to international imbroglios and even to open 
war. What, then, is the motive that induces the citizens 
of one country to lend to those of another, or, in other 
words, what is the basis of international credit? It is, 
in a word, the hope of large profits. 

The borrowing nations in the world economy are in 
general those with undeveloped resources; they are the 
countries young or industrially backward, but possessed 
at the same time of great natural resources the exploita- 
tion of which promises rich return. The investment of 
capital in these countries results in a large increase in 
production which enables the payment of interest and 
ultimately the repayment of the borrowed capital. By 
securing the capital goods of an industrially developed 
country, the improved agricultural machinery, mining 
machinery, railroad construction material and rolling 
stock, etc., the young country is able to avoid the slow 

10 



NATIONAL AND INTERNATIONAL CREDIT 

and painful process of inventing and producing this 
equipment. It secures at. once the latest devices of 
man's ingenuity. Equipped with those implements, 
such a country is able to multiply its productive 
capacity many fold. Perhaps no other single form of 
investment of foreign capital shows this result more 
quickly than expenditure for railways. The natural 
resources of the new country are thereby brought at 
once within the reach of a market. 

The opportunity for large profits through the develop- 
ment of the resources of an undeveloped country has 
unhappily led to the exploitation of men as well as of 
nature and to political intrigue and international mis- 
understanding. The colonial trader was indeed once the 
chief cause of wars, but his place has now been taken 
by the concessionary interest.* Fortunes have been 
accumulated, especially in the tropical and semi-tropical 
regions, by the exploitation of natural resources, the 
opening of oil fields and mines, the building of railways 
and. water-power plants, and by other enterprises. Such 
concessions are a prolific cause of war as they need and 
demand the support of the home Government. 

Here we are concerned, however, with the legitimate 
investment of the surplus capital of an older State in 
the undeveloped resources of a younger one. This is 
immediately reflected in the trade relation between the 
two countries and continues to affect the balance of 
trade until the debt is entirely expunged. All the 
nations of the world may be grouped in one or the other 
of these classes, the lending and the borrowing countries. 
The chief countries that have supplied capital to other 

* Foreign investment and concessions are discussed at length in 
this series in W. S. Culbertson, Commercial Policy in War Time 
and After. Cf. also A. S'. Johnson, "The War: By an Econ- 
omist," Unpopular Review, ii (July-December, 1914), p. 411. 

11 



WAR COSTS AND THEIR FINANCING 

lands are Great Britain, Germany, France, The Nether- 
lands, Belgium, and Switzerland. Of these countries 
Great Britain is by far the most important lender. On 
the other hand, the important borrowing countries have 
been the United States, Canada, the Australian colonies 
of Great Britain, British India, Argentina, Chile, 
Mexico, China, and Japan. 

In these movements of capital Professor Seligman 
finds the fundamental underlying explanation of the 
late world conflict. Nations pass through three stages 
of economic national development. In the first they 
develop their resources and build up their industries, 
isolating themselves by means of a protective tariff. In 
the second stage of economic nationalism they export 
commodities and seek colonial expansion. In the third 
stage they supplement the export of commodities with 
the export of capital, when they find it to their advan- 
tage to preach the gospel of cosmopolitanism and the 
benefits of international trade. Great Britain had 
already been long in the third stage; Germany, just 
emerging from the second, found in that country her 
strongest rival. The export of capital yielded its great- 
est profits in the economic penetration of backward 
countries, and in this Germany was determined to par- 
ticipate at all hazards. This was her '' place in the 
sun." The industrial inequality of different countries 
permitted, and in fact induced, the exploitation of the 
backward ones by those capitalistically developed. 
Hence international investment of capital, which should 
promote international peace and good will, has in fact 
become the gage of an economic struggle between 
nations.^ 

^ E. E. A. Selijiman, " An Economic Literpretation of the War," 
in Prohlems of Readjiistment after the War (1915), pp. 55, 61. 

12 



NATIONAL AND INTERNATIONAL CREDIT 

The lending and borrowing of capital takes place by 
the transfer of commodities, and the extent of this 
movement is evidenced by statistics of exports and 
imports. One would therefore expect a lending country 
to export more than it imported and a borrowing coun- 
try, on the otlier hand, to import more than it exported. 
The movement has gone on so long, however, that the 
wealthy lending countries now receive interest and other 
payments in excess of the annual investment of capital 
in foreign lands ; consequently their imports exceed their 
exports. So, too, the payments on capital already 
invested exceed the new investments in the case of the 
more important debtor nations. In some of the borrow- 
ing countries, however, the investment of capital is still 
taking place on a considerable scale, and their imports 
continue to be larger than their exports. The table on 
page 15 shows these facts for 1913, the last normal year 
before the World War. 

In a monograph submitted to the National Monetary 
Commission on " The Trade Balance of the United 
States, ' ' ^ Sir George Paish, editor of the London Statist, 
estimated the amount of capital invested by various 
European countries in the United States about 1909. 
According to this estimate Great Britain possessed about 
$3,500,000,000 of American securities; French invest- 
ments amounted to nearly $500,000,000; the amount of 
German investments was placed at about $1,000,000,000, 
and that of Dutch capital at $750,000,000. In the 
aggregate the amount of European capital invested in 
*' permanent " securities in the United States was 
approximately $6,000,000,000. The net payments of 
interest upon this capital required the remittance annu- 
ally by the United States of some $225,000,000. Other 

•Report of the National Monetary Commission, xx, p. 169. 

13 ' 



WAR COSTS AND THEIR FINANCING 

expenditures, such as tourist travel, remittances by 
immigrants, freights, insurance, etc., brought the total 
annual drain on American capital up to $500,000,000 in 
years of depression and to $600,000,000 in years of 
normal trade activity. 

The export of capital has been an international 
phenomenon of growing importance during the nine- 
teenth and twentieth centuries. In the extent of her 
foreign investments Great Britain has led all countries. 
The amount of these investments has varied from time 
to time, but on the whole they have shown a fairly 
steady increase. This was particularly marked in the 
last few years before the outbreak of the Great War, 
as is shown by the following annual figures of invest- 
ments in the colonies and abroad -J 

British Investments Abboad, 1907-1912 
19C7 $701,000,000 

1908 649.500.000 

1909 550.500.000 

1910 754.000.000 

1911 961.000.000 

1912 1,130,000.000 

Although these figures do not measure exactly the 
export of capital, because of the flow of securities back 
and forth, they indicate roughly the enormous move- 
ment that was taking place. The total amount of British 
investments abroad at the end of December, 1913, was 
estimated by Sir George Paish at about $20,000,000,000,^ 
about 23 per cent, of the total capital investments of 
the nation. This sum was almost equally divided 
between the British colonies and possessions on the one 
hand and foreign countries on the other. Of the for- 
mer, Canada was the favorite land of investment, over 

^C. K. Hohson. The Export of Capital (London, 1914). p. 223. 
^8tatist, February 14, 1914. 

14 



NATIONAL AND INTERNATIONAL CREDIT 



Foreign Trade op Leading Lending and Borrowing 
Countries, 1913 

(In millions) 



Country 




Balance 
of trade 



Group I. Lending Countries which were receiving Net Income from 
their Investments 



Great Britain 

France 

Netherlands. . 
Germany. . . . 
Belgium 




Excess of 
imports 

$670 
420 
334 
253 
202 



Group II. Borrowing Countries whose Payments were Greater than 
Present Additions of Capital 



United States 

Russia 

British India. 
Argentina.. . . 




Excess of 
exports 

$615 

173 

70 

65 



Group III. Bo'^rowing Counties in which Continued Investment of 
Foreign Capital is Still Taking Place 

Excess of 
imports 

$450 

171 

125 

90 



Japan. . 
Canada 
China. . 
Turkey. 




one-eighth of all foreign investments being placed there ; 
in the other group a still larger amount was invested 
in the United States. Other countries especially favored 

15 



WAR COSTS AND THEIR FINANCING 

b}^ British investors were India and Ceylon, South 
Africa, Australia, Argentina, and Brazil, in the order 
named. Only about five per cent, was placed in Europe. 
There was evidenced a wide geographical distribution, 
a spreading of risks in many countries. The income 
accruing from these investments at the time of the out- 
break of the war was probably about $1,000,000,000 
per year. 

Very different has been the geographical distribution 
of French and German foreign investments. Both of 
these countries had a later industrial development than 
Great Britain and a smaller foreign trade, and conse- 
quently their investments outside of their own borders 
have not been so large. Those of France were estimated 
in 1902 by the French ^Minister of Foreign Affairs at 
30,000,000,000 francs. A decade later M. Yves Guyot 
estimated that they had increased to 40 to 42,000,000,000 
francs (8 to 8,400,000,000 dollars), or 37 per cent, of 
the total amount of French capital invested in personal 
securities.® In 1916 C. K. Hobson made an estimate of 
$8,766,000,000.10 At the same time Mr. Hobson esti- 
mated the foreign investments of Germany to be about 
$4,870,000,000, or about 6.6 per cent, of the total invest- 
ments of the nation. A much higher estimate was given 
by the Federal Trade Commission, which placed the 
ameunt of German foreign investments at the begin- 
ning of the late war at between $7,500,000,000 and 
$8,500,000,0000.11 The investments of the French 
tended to concentrate in Europe, especially Russia. Tur- 

^ " The Amount, Direction and Nature of French Investments," 
Annals of the American Academy of Political and Social Science, 
November. 1916, pp. 43, 50. 

^'Ilid., 32. 

"Report on Cooperation in American Export Trade (1916), 
Part 1, p. 72. 

16 



NATIONAL AND INTERNATIONAL CREDIT 

key and Rumania, and in Mexico, while those of Ger- 
many were found in the neighboring countries of 
Austria-Hungary, Italy, Rumania and the Balkans, 
although both nations had large interests in South 
America and South Africa. 

Belgian foreign investments in 1911 were estimated 
at about $540,000,000,^^ ^^^^ ^j^^gg of Switzerland at 

$520,400,000. The foreign holdings of the Dutch were 
also considerable. Those of the capitalists of other 
European countries are much smaller; no country lacks 
them altogether, but in no other case are they compar- 
able with those already mentioned. 

In addition to these loans on the security of bonds, 
stocks, and other securities, there has been also in some 
cases direct industrial investment by the citizens of one 
country in another through the building of plants, 
branch factories, etc. But the characteristic feature of 
these international investments was after all their 
impersonal nature; although the capital itself was 
exported, the owner remained at home and drew his 
interest or profits from abroad. So widespread have 
been these movements that no country has been un- 
affected by them, either as creditor or debtor. A per- 
fect network of international finance bound the nations 
of the world together. Although these ties did not 
prove sufficiently binding to prevent the outbreak of 
war between the nations thus united, as Norman Angell 
in his suggestive book The Great Illusion hoped they 
might, yet they had important consequences. It is not 
possible to establish any connection between the exist- 
ence of investment relations and the later military 
alliances. Germany had invested largely in Austria- 
Hungary and Italy, m Bulgaria and Rumania, but she 

17 



WAR COSTS AND THEIR FINANCING 

had as many enemies as friends among these nations. 
France was the largest creditor of both Russia and 
Turkey, but this fact did not determine their allegiance 
in war. Nevertheless, the existence of these interna- 
tional investments brought serious problems to the front 
upon the outbreak of the war. On the whole the Central 
Powers suffered more from the suspension of normal 
credit relations between the nations than did the mem- 
bers of the Entente. As a basis for credits and for use 
as collateral the existence of these foreign investments 
proved of great service, especially for Great Britain and 
France. 

The flow of capital and the movement of foreign trade 
long ago became so complex and intricate that a sort of 
international clearing house was needed to care for these 
transactions. For this purpose London was admirably 
suited. She had first secured the position as the center 
of international trade after the sacking of Antwerp in 
1567, and although Amsterdam later gained importance 
as a commercial and financial mart, London soon took 
the leading place in Europe. 

The predominance of London as the world center of 
international trade was never greater than during the 
period just before the Great War. Although the direct 
trade of other nations, as France, Germany, and to a 
smaller extent Italy and Austria-Hungary, had in- 
creased, the share of London in the world's commerce 
grew steadily. Her central geographical location made 
her the most convenient depot and trading point for the 
trade between the Far East, Europe, and America. 
Great Britain's large mercantile marine, her excellent 
mail and cable connections, and a comprehensive insur- 
ance system gave London special facilities for handling 

18 



NATIONAL AND INTERNATIONAL CREDIT 

the business, in connection with which an expert trading 
organization had been developed. Especially important 
was the highly perfected banking system, which was 
peculiarly adapted to the granting of the short-term 
loans called for in financing this world trade. Hence 
most international payments were made in London and 
international accounts were cleared there. Foreign bank- 
ing houses kept deposits in London. Bills of exchange 
were generally drawn on London. Banks and ex- 
porters in South America, India, or Europe were paid 
in these bills, which were accepted by the English banks. 
Sterling became the currency of international com- 
merce. ]\Ir. Lloyd George described these operations in 
a speech in November, 1914, as follows : 

I ask anj^one to pick up just one little bit of paper, one 
bill of exchange, to find out what we are doing. Take the 
cotton trade of the world. The cotton is moved first of all 
from the plantations, say, to the Mississippi; then it is moved 
down to New Orleans; then it is moved either to Germany or 
Great Britain or elsewhere. Every movement there is repre- 
sented by a paper signed either here in London or Manchester 
or Liverpool; one signature practically is responsible for the 
whole of those transactions. Not merely that, but when the 
United States of America bought silk or tea in China this paj^- 
ment was made through London. By means of these documents 
accepted in London, New York paid for the tea that was 
bought from China. We were transacting far more than the 
whole of our own business ; we were transacting half the busi- 
ness of the world as well by means of these paper transac- 
tions. What is also important to establish is this: that the 
paper which was issued from London has become part of the 
currency of commerce throughout the world. 

So intimate and close were the economic and com- 
mercial bonds which united nations, and so large was 
the stream of goods which fiowed in every direction 

19 



WAR COSTS AND THEIR FINANCING 

between them that it seemed to many that the stage 
of a world economy had actually been reached. Although 
nationalism had lost nothing of its strength, a new 
economic internationalism was developing which gave 
promise of checking militarism and of securing peace 
to the world. The w^ar was to show, however, that the 
program of economic internationalism might not suit 
the nationalistic ambitions of a vigorous but misguided 
people. 



CHAPTER II 

FINANCIAL READJUSTMENTS AT THE OUTBREAK OF WAR 

Germany's preparedness — The Entente Allies caught unaware — 
Panic and temporary breakdown of credit — Remedial meas- 
ures — Safeguarding the gold reserves — Issue of additional 
money — Adjustment to war conditions. 

In spite of a generation of armament and war talk 
the actual outbreak of war on August 1, 1914, fell upon 
an unprepared world. Germany alone of all the com- 
batants was ready. She had made full preparation, not 
only of a military nature, but also with equal care and 
thoroughness along financial lines. It is said that at 
the time of the Morocco episode in 1911 the Kaiser 
decided that the time was ripe for Germany to strike, 
but was informed by his Minister of Finance that the 
financial situation would not permit a declaration of 
war. Thereupon he told the Minister of Finance to see 
to it that the next time he asked that question he 
received a different answer. "Whether this story is true 
or not, it is certain that since the Morocco episode Ger- 
many had taken steps to strengthen herself financially 
in various respects. At that time she owed large sums 
abroad, and upon the threat of war French capitalists 
called in large balances due them by German banks 
and also began to dispose of German securities. This 
nearly brought on a crisis in Germany and without 
doubt forced the German militarists to yield their 
demands. 

The difficulty with France in 1911 was used in the 
following year as an excuse to secure additional military 

21 



WAR COSTS AND THEIR FINANCING 

credits and to increase the army. After the Balkan 
wars in 1913 a further addition was made to the 
army and munitions and other materials of war were 
collected.^ To secure the necessary funds to meet these 
expenditures the so-called Wehrheitrag was imposed, a 
special, nonrecurring tax on incomes and real property 
from which it was expected to realize $250,000,000. 
This tax was to be paid in three installments in 1913, 
1914, and 1915, but these payments were later post- 
poned a year, and after the outbreak of the World War 
they were hardly distinguishable from other taxes. In 
the budget of 1913 the revenue from this source was 
set down at $104,196,750. The total actual yield of the 
Wehrheitrag during the war was recently stated to have 
been $241,713,525. 

Along with the increases in the military establish- 
ment efforts were made to build up the gold reserve in 
the war chest. The war chest was a peculiarly Prussian 
institution. Collected in Prussia by Frederick the 
Great, upon the formation of the Germany Empire it 
had been turned over to the Imperial Treasury. A 
part of the French indemnity, amounting to about 
$30,000,000 in gold coin, had been placed in the war 
chest in 1871. By an act of July 3, 1913, provision 
was made for the sale of Imperial Treasury notes for 
gold to a similar amount and the addition of this gold 
to that already in the war chest. About $21,000,000 
had actually been obtained and placed there at the time 
the war broke out, so that the war-chest fund contained 

^ A study of the imports into Germany of copper and other 
metals that enter largely into war materials and of cotton, rub- 
ber and similar articles essential for war purposes shows that the 
purchases of all these articles during 1913 and 1914 were far in 
excess of the normal imports for the preceding decade. For a 
discussion of German mineral imports immediately before the war 
see, in this series, George Otis Smith, The Strategy of Minerals, 

22 



READJUSTMENTS AT OUTBREAK OF WAR 

between $50,000,000 and $60,000,000 m gold, in addi- 
tion to a considerable store of silver. 

Efforts were also made to build up the stock of gold 
in the possession of the Reichsbank. The theory had 
previously been held that it was a wise financial policy 
to secure as large a circulation of gold among the people 
as possible. This saturation of the currency with gold 
provided a fund which, in an emergency, the Govern- 
ment might utilize by the issuance of paper money. 
About a decade before this time, however, Germany, in 
common with some of the other governments of Europe, 
had embarked upon a new policy with respect to the 
gold stock of the country. This was that the gold should 
be accumulated and held by the great central banking 
institution of the country, which should then issue the 
necessary media of exchange in the form of bank notes. 
In accordance with this view an act of 1906 had author- 
ized the issue of notes of the Reichsbank in denomina- 
tions of 50 and 20 marks, the lowest previous denomina- 
tion having been fixed at 100 marks. Three years later 
the bank notes were made full legal tender. Imperial 
Treasury notes (Reichskassenscheine) were also placed 
in circulation in denominations of ten and five marks. 
As a result of the issue of these forms of paper, gold 
tended to accumulate in the Reichsbank, which was able 
to increase its reserve from $258,000,000 in July, 1911, 
to $339,000,000 in July, 1914. 

It would appear from recent disclosures that Germany 
was prepared to force the issue in 1913, but was pre- 
vented from doing so at that time by the refusal of 
Italy to join Germany and Austria-Hungary in an 
offensive war. The burden of the additional military 
expenditures and the impending exactions of the 
Wehrheitrag made the Junkers prefer actual war, from 

23 



WAR COSTS AND THEIR FINANCING 

which they expected to derive a profit, to the costs of 
an unproductive armament. The militarists, who could 
hardly be restrained in 1911 and 1913, were completely 
out of hand in 1914. The murder of the Archduke 
Franz Ferdinand at Serajevo on June 28, 1914, afforded 
the excuse for a premeditated attack. 

Strange as it seems to-day, looking back over the 
years of preparation on the part of Germany, of her 
sword-rattling and then dimly understood mutterings 
of world domination, the war undoubtedly came as a 
surprise to the rest of the world.^ The signs of the 
impending conflict were clear, but they were unheeded. 
The most effective answer to Germany's off-repeated 
charge that the war was begun by her enemies and that 
England especially was responsible for initiating it, is 
to be found in the financial, as well as in the military 
unpreparedness of Great Britain. England had given 
hostages to peace in her great foreign investments. 
London was the center of a delicately organized 
mechanism for transacting and financing international 
trade. Any disturbance of these complicated economic 
and financial relations would have more serious conse- 
quences to Great Britain than to any other country. 
British investments abroad were estimated at about 
$20,000,000,000, the annual return upon which amounted 
to some $1,000,000,000. The investment of British capi- 
tal in foreign countries was estimated to amount on the 

'"In August, 1914, the shock came upon the world's great 
financial markets with as complete a violence and suddenness as 
it is possible, in an event of such immense importance, to imagine 
. . . it is probable that no other war in modern times — with 
the possible exception of the Franco-Prussian War of 1870 
— has taken the great financial communities so completely oflF 
their guard." (A. D. Noyes, Financial Chapters of the War, p. 
25. ) 

24 



READJUSTMENTS AT OUTBREAK OF WAR 

average to about $800,000,000 annually. As a result 
of the interest paid to her upon investments abroad 
and the payments for the services of her ships and 
banking and insurance institutions, imports into Great 
Britain greatly exceeded her exports. In the year 1913 
the excess of imports over exports amounted to 
$670,000,000, which represented the payment for capital 
and services by the rest of the world. As a creditor 
nation on the vastest scale, it would seem that Britain 
had more to lose by a world war than any other nation. 
France, like England, was also a creditor nation on a 
large scale and had extensive investments in Russia, 
the Near East, and South America. The excess of 
French merchandise imports over exports for the year 
1913 amounted to about $420,000,000. During the first 
six months of 1914 France had loaned large sums to 
Greece, Turkey, and Serbia. The financial relations 
between France and most of the other countries of 
Europe were so intimate and so complicated that any 
break would be sure to prove disastrous. France had 
already been hard hit by the two Balkan wars because 
of her large loans to Balkan states, and she was at 
this time primarily interested in the restoration of peace 
and prosperity in that section of Europe. Moreover, 
the financial situation itself in France was unsatisfac- 
tory in the early part of 1914. The settlement of 
expenses in Morocco, the introduction of the three-year 
service law in response to Germany's enlargement of 
her army, and an increase in the navy had imposed new 
burdens which led to repeated deficits. To meet these 
deficiencies a new internal loan of $180,000,000 was 
authorized by an act of June 30, 1914. The issue of 
this loan should of itself absolve France from suspicion 
as instigator of the war. 

25 



WAR COSTS AND THEIR FINANCING 

In Russia the fiscal situation in 191-i was sound. A 
period of industrial expansion had begun after the war 
with Japan, especially in oil production, and industrial 
activity gave a firm foundation for the State finances. 
For several years the budget had shown a surplus. Not 
only this, but the Treasury had been able to reduce 
the Government debt by about $100,000,000 in the years 
from 1910 to 1913, and had also accumulated an emer- 
gency reserve fund of about $250,000,000. In 1911: 
there had been accumulated in the Bank of Russia the 
largest supply of gold in the history of that institution, 
amounting to $800,000,000, which was probably the 
largest store in any European country. On the other 
hand, the general economic situation was less encourag- 
ing. The large loans made in Europe, particularly in 
France, had probably not quickened production suffi- 
ciently to meet the enhanced interest payments,^ which 
by 1914 were not far short of $165,000,000 annually. 
Manufactures and mining showed some development, 
but agriculture, the mainstay of the people, made little 
improvement. In the summer of 1914 the harvest was 
especially poor, owing to a severe drought. The gross 
crop of all cereals in all Russia amounted, on the aver- 
age for the four years 1910-1913, to 58,000,000 metric 
tons, but in 1914 it was only 53,000,000 metric tons. 
The banks had financed the producers, and as the war 
broke out in mid-harvest, they were hard hit by the 
crop failure. 

The financial condition of Austria-Hungary in 1914 
was probably worse than that of any other nation in 
Europe with the possible exception of Turkey. Owing 
to the heavy costs of armament and preparation for war, 

^ H. M. Hjndman, " The Economic Basis in India," Asia, June, 
1919, p. 534. 

26 



READJUSTMENTS AT OUTBREAK OF WAR 

the Government had for years faced deficits in the 
annual budgets. The credit of the Empire was conse- 
quently seriously impaired. Nor were private finances 
in a more flourishing condition. Money was high, 
bankruptcies were frequent, industries were suffering, 
and unemployment was common. Moreover, the 1914 
Hungarian harvest, like that of Russia, had proved 
almost a failure. A less propitious time for a declara- 
tion of war could hardly have been selected, but it is 
now apparent that, assured of the support of her 
stronger ally, Germany, the Dual Monarchy believed 
that this opportunity of crushing Serbia and supplant- 
ing the growing influence of Russia in the Balkans was 
too favorable to let slip. 

Taking the situation in Europe as a whole, it is fairly 
obvious that in spite of the enormous expenditures on 
armament and the enlargement of military forces on 
the part of some of the European nations, the bankers, 
the merchants, and the man in the street regarded war 
as but a remote possibility. Unhappily, the interna- 
tionalism of trade and finance did not act as a deterrent 
as many had fondly hoped it would. Imperialistic 
ambition and the complete subordination of government 
to the machinations of a military clique were sufficiently 
powerful in Central Europe to override purely commer- 
cial or financial considerations. It must not be over- 
looked, however, that certain economic forces were at 
work in Germany which impelled her to seek what her 
writers termed ' ' a place in the sun. ' ' 

The assassination of the Austrian Archduke occurred 
on June 28, 1914. Within two weeks there was a serious 
fall of 10 to 20 per cent, in the prices of stocks in 
Vienna. Upon Austria-Hungary's ultimatum to Serbia, 

27 



WAR COSTS AND THEIR FINANCING 

which was delivered on July 22 and an answer to which 
was demanded by the 25th, there was a further break 
in stocks in Vienna, which this time extended to Berlin 
and Paris. In both Germany and France the conditions 
on the stock exchanges became panicky. When Russia 
announced on July 25 that she would protect Serbia, the 
panic became general. Heavy selling of securities on 
foreign account took place in the New York market. So 
serious did conditions become on the Continent that on 
July 27 the exchanges at Vienna, Budapest, Brussels, 
and Antwerp were closed. On the 28th Austria- 
Hungary declared war against Serbia, and on the same 
day the exchanges at Montreal, Toronto, and Madrid 
closed their doors, to be followed the next day by those 
of Berlin and Petrograd. Events now moved so rapidly 
that it was impossible for the market to adjust itself. 
On July 29 Russia mobilized. Two days later Germany 
sent her ultimatum to France and the next day started 
on her march toward Paris. On August 4 German 
troops entered Belgium and that night Great Britain 
declared war on Germany. It had become evident 
almost from the first that the conflict could not be 
localized. The stock exchanges in all South American 
countries closed on July 30, and in Paris the coulisse 
was forced to suspend dealings. On Friday morning, 
July 31, the London Stock Exchange officially closed, 
and this action was followed a few hours later by an 
announcement that the New York Stock Exchange would 
not open for business. 

It is evident from this brief chronology that Austria- 
Hungary's ultimatum to Serbia was correctly inter- 
preted by the stock market, and that her declaration of 
war, in spite of the semi-official declaration '' that she 
hoped the contest would be localized," was regarded as 

28 



READJUSTMENTS AT OUTBREAK OF WAR 

the first step in a world conflict. By the end of the 
month of July all the important markets had succumbed 
to panic, and there was an almost complete breakdown 
of that delicate mechanism of international exchange 
which had been so carefully built during the preceding 
years. The crisis found its readiest expression in the 
operations on the stock exchanges, and consequently 
these institutions were the first to cease to function when 
steps become necessary to prevent further spread of 
the panic. The selling of stocks in general was due to 
the efforts of persons having debts to pay or wishing to 
place themselves in funds to realize at once upon their 
securities. If this movement had continued unre- 
strained, it would of course have resulted in a tremen- 
dous fall in the prices of securities. It was felt that 
it was better to check this tendency than to permit the 
securing of funds at ruinous discounts. 

As London was the world center of international 
trade and finance, the events in that city assumed 
greater importance than those in other places and they 
have consequently received most attention. To carry 
on this international trade there had grown up in Great 
Britain a complex credit organization of bill brokers, 
discount and acceptance houses, and joint-stock banks, 
with the Bank of England at the head. Exporters of 
commodities from foreign countries were in the habit 
of selling their goods for bills of exchange drawn on 
London. To secure cash immediately the exporter 
would then sell his draft to a bill broker or acceptance 
house in London. These in turn would probably borrow 
from the joint-stock banks, which finally looked for 
assistance to the Bank of England. The payment of 
the obligations of one of these agencies to another rested 
ultimately upon the ability of the buyer of the foreign 

29 



WAR COSTS AND THEIR FINANCING 

goods, against whom the draft was drawn, to dispose 
of his goods and to meet his obligations. If the trans- 
action were interrupted at any point, the credit organi- 
zation would be, temporarily at least, thrown out of 
gear. The situation was complicated, moreover, by the 
fact that the joint-stock banks, which held deposits call- 
able on demand, loaned out a great deal of their money 
to stock-exchange dealers. When the prices of securities 
began to fall, they started to call in loans, an act which 
threatened many of their customers with bankruptcy. 
To save them the Government arranged with the Bank 
of England that it should advance to lenders on stock- 
exchange accounts outstanding on July 29, 60 per cent, 
of the value of the securities at the prices of that 
date. 

More pregnant of danger, however, was the position 
of the acceptance houses which had discounted foreign 
bills with the joint-stock banks or other institutions. 
The situation that developed has been thus clearly 
stated by Professor Laughlin :* 

It suddenly became evident, however, that the drawers of 
these foreign bills could not remit funds on a very large scale 
to meet them when due. If the drawers could not pay, the 
acceptance houses could not; if the acceptance houses could 
not pay, then these bills, which formed assets in the discount 
houses and banks, were frozen. It is estimated that the sum 
total of bills involved amounted to about $1,750,000,000; of 
these the banks held from $500,000,000 to $625,000,000, con- 
stituting perhaps 15 per cent, of their assets. 

In such a crisis, when there was an interruption of 
the shipment of goods and also of gold with which the 
debts could have been met, the proper thing for the 
banks to have done was to extend further accommodation 

* J. L. Laughlin, Credit of the ^^ations (New York, 1918), p. 82. 

30 



READJUSTMENTS AT OUTBREAK OF WAR 

to the acceptance houses and brokers in order to tide 
them over the period of panic and temporary stoppage 
of exchange. The banks, however, pursued the opposite 
policy of protecting their reserves and of calling in 
funds. In this emergency the borrowing public was 
forced to turn to the Bank of England, and the conse- 
quent great pressure for loans from that institution 
drove the bank rate as high as 10 per cent, on August 1. 

The situation was further complicated by the fact 
that Monday, August 3, was a regular bank holiday, so 
that the end of the previous week saw the people who 
were planning expeditions into the country calling upon 
the banks for cash. To their surprise they were given 
only 10 per cent, in gold and 90 per cent, in Bank of 
England notes, the lowest denomination of which ($25) 
was inconveniently large for ordinary expenditures. 
This led to a rush to the Bank of England for redemp- 
tion of its notes in gold, the demand being so great that 
long queues of people were formed outside the bank. 

As a result of these various demands the Bank of 
England lost $80,000,000 in gold and notes, its reserves 
being thereby depleted to less than $138,000,000. In 
this emergency the first thing to do was to gain time. 
Three extra bank holidays were declared, which post- 
poned the opening of the bank until Friday morning, 
August 7, and gave the authorities opporunity to pre- 
pare remedial measures. It is probably incorrect to 
say that there was a panic, but there was need for 
prompt measures to relieve the money stringency and 
the breakdo^^n of credit. The measures adopted to 
remedy the situation will be described hereafter. 

In France, because of the invasion of her territory, 
the shock to public credit was probably greater than in 
any other country except Belgium. Although France 

31 



WAR COSTS AND THEIR FINANCING 

did not have the widely scattered and intricately rami- 
fied international trade relations which Great Britain 
possessed, a considerable part of the income of her 
people was derived from foreign investments. Many of 
these securities were unsalable, even at panic prices, and 
the banks that had made loans upon them as collateral 
were unable to secure payment of their loans. More- 
over, the value of these securities as collateral for loans 
declined greatly. The invasion by the Germans of the 
northeastern section of France lost her the country's 
richest coal fields and those districts in which the lead- 
ing textile and iron industries were carried on. French 
industry and agriculture were also struck a severe blow 
by the withdrawal from economic activity of practically 
all the able-bodied men as a result of the general 
mobilization order of August 1. It is evident that in 
circumstances like these it is immaterial whether one 
describes the resulting conditions as those of panic or 
not. There was a complete breakdown of the normal 
organization of industries and the coordinate credit 
structure. In France also immediate and far-reaching 
measures were necessary to protect the rights of both 
debtors and creditors and, so far as possible, to provide 
means for the continuance of necessary economic 
activities. 

As Russia is primarily an agricultural country, there 
did not exist there the delicately organized mechanism 
of credit and foreign trade such as had been developed 
in England and, to a less degree, in France and Ger- 
many. Consequently the disorganization of business in 
Russia was not so complete or so widespread. The 
partial failure of the crops had already involved the 
banks, whose credit was strained before the outbreak of 
the war. Mobilization came after harvest throughout 

32 



READJUSTMENTS AT OUTBREAK OF WAR 

a considerable section of the Empire, and it was there- 
fore not so serious as it would have been a month earlier. 
Still, the problems were similar to those in other coun- 
tries, differing only in degree, and to meet them similar 
remedial measures were adopted. 

In the field of finance, as in military details, Germany 
had made all possible preparations for the war, and she 
had hoped by her carefully planned measures to avoid a 
shock to her industries and credit such as occurred in the 
other belligerent countries. But no nation carrying on 
the far-reaching operations of trade and finance in which 
Germany w^as involved before the war could suddenly 
cut off her relations with the outside world without 
feeling the shock of such an amputation. Allusion has 
already been made to the panic on the Berlin Stock 
Exchange and the closing of that institution on July 29. 
There occurred in Germany a phase of panic that was 
not duplicated, at least to the same extent, in other 
countries; there were runs on the banks by frightened 
depositors. On a single day, August 3, the Berlin 
savings banks lost over $230,000,000. Hoarding also 
took place, not of gold merely, but also of notes and 
silver. The resulting shortage of money was met by the 
issuance of Imperial Treasury notes for 10 marks and 
of loan office notes for one and two marks. As in the 
other belligerent countries, the calling of the able-bodied 
men to the colors crippled industry, but the disturbance 
was probably not so great in Germany as in the others 
because of her carefully worked-out plans for handling 
this problem. 

The situation in Austria-Hungary was not dissimilar 
from that in the other warring countries, due allowance 
being made for differences in conditions. The stock 
exchanges were closed, a moratorium was declared, and 

33 



WAR COSTS AND THEIR FINANCING 

specie payments were suspended. The financial, indus- 
trial, and commercial world of the Dual Monarchy was 
disturbed by the same shocks that affected other coun- 
tries, and it suffered the same effects. 

If the foregoing analysis is correct, it is clear that 
an immediate difficulty brought about by the outbreak of 
the World War was the breakdown of credit, both 
national and international. The production and move- 
ment of goods having been interrupted, the credit trans- 
actions based upon these primary operations were dis- 
organized. There was not so much a distrust of credit 
as there was a complete stoppage of ordinary trans- 
actions. Since the movement of goods was stopped, 
payments based upon them could not be made when 
due. In these circumstances the first necessity was the 
further extension of credit. But more than that was 
needed. Since the ordinary credit machinery had 
broken down, a larger amount of the other media of 
exchange must be at once supplied. At the same time 
the reser^^s of the banks, especially the gold holdings 
of the great central institutions, had to be safeguarded 
and their dissipation prevented. To meet these various 
aspects of the situation three different types of remedy 
were adopted, the emphasis being differently placed 
in the various countries. 

(1) Moratoria. — Although the moratorium was un- 
familiar to American business men, it was a device which 
had frequenth^ been made use of in Europe; it was 
generally adopted in France during the Napoleonic 
wars. The situation in 1914 was so unparalleled and 
the derangement of business so universal that the 
moratorium was adopted by practically all the belliger- 

34 



READJUSTMENTS AT OUTBREAK OF WAR 

out nations as well as by a large number of neutrals. 
By the end of 1913, 19 nations had resorted to this ex- 
pedient. Briefly defined, the moratorium is an act which 
postpones the date on which debts have to be met. The 
principle of the moratoria of 1914 was the same in all 
cases, though the period of postponement differed from 
country to country. In Great Britain the original 
proclamation of August 2, known as the Postponement 
of Payments Act (4 & 5 Geo. V, Ch. 11), declared a 
moratorium of one month, which was later extended to 
October 4. It affected an enormous volume of business 
and is estimated to have stopped payment on credit 
instruments having a face value of $2,000,000,000. 
Referring to this Act, Lloyd George said in a speech 
in the House of Commons on November 27, 1914 : ' ' We 
first declared a moratorium, a limited moratorium, so 
as to give us time to look around." There has been 
much, discussion of the wisdom of this course. At the 
time it was pointed to by the Germans as an evidence 
of the breakdown of the English credit system. But 
in view of the general demoralization of foreign trade 
and exchange the world over, it would have been impos- 
sible to have insisted upon the immediate se-ttlement of 
debts. The postponement of settlement for a reasonable 
time both enabled the debtor to make satisfactory pro- 
vision for ultimate payment and tended to restore 
confidence. 

The Government arranged with the Bank of England 
that it should discount all approved bills of exchange 
accepted before August 4 and continue them, if unpaid 
at maturity, until one year after the war at a rate two 
per cent, higher than the bank rate. At the same time 
the Bank proceeded boldly to discount new acceptances. 
This arrangement greatly relieved the exchange market 

35 



WAR COSTS AND THEIR FINANCINa 

but imposed upon the Bank a heavy burden and exposed 
it to possible ultimate loss. In this emergency the 
unprecedented step was taken by the Government of 
guaranteeing the pre-moratorium bills of exchange, with 
the expectation that smy resultant loss would be charged 
up to war costs. It has been estimated that the total 
current liability on pre-moratorium bills of exchange 
amounted to $3,000,000,000, of which about $2,250,000,- 
000 was discounted at the Bank of England under this 
Government guarantee. These bills, however, have been 
met at maturity, and it is said that the ultimate loss, 
which can only be determined one year after the conclu- 
sion of peace, may not exceed $150,000,000. 

The French Government at the outbreak of war post- 
poned for one month the payment of all negotiable 
instruments maturing between July 31 and August 31 
provided they had been endorsed prior to August 4, 
This was wider in its application than the British Act 
since it included sight drafts as well as long bills. 
General use was made of the privilege granted. The 
moratorium was later extended to other liabilities, and 
its termination was postponed from time to time, so 
that in some applications it continued throughout the 
war.^ The Bank of France carried most of the burden 

^ One of the curious effects of the moratorium in France was 
observable in the case of house rentals. Under it tenants were 
absolved from the obligation of paying rent. The absolution was 
universal; neither rich nor poor had to pay. House property is 
a favorite form of investment of thrifty Frenchmen, and the 
anomaly thus introduced by the moratorium cut off the total 
income ot thousands of " house-poor " French, in some cases the 
owners becoming charwomen to the non-rent-paying tenants. The 
moratorium also established the obligation of extending the leases, 
written or unwritten, at the same rental for a period equal to the 
duration oi the war. To offset this burden on the houseowner. 
however, the Senate and Chamber provided that in communes of 
less than 10.000 inhabitants, when the income thus cut off did 
no'-, exceed 5.000 francs, the owner was entitled to an indemnity 

36 



READJUSTMENTS AT OUTBREAK OP WAR 

of these obligations, although it was not, like the Bank 
of England, guaranteed against loss by the Government. 
The total pre-moratorium paper at the Bank of France 
amounted in August, 1914, to almost $900,000,000. This 
amount had been reduced by December, 1915, to 
$367,000,000, and by June, 1919, to $206,000,000. It 
is reasonable to expect that the final losses of the Bank 
of France will be reduced to a manageable sum. 

The methods adopted in other countries were similar 
to those already described. In Russia a moratorium was 
immediately declared for one month, covering bills of 
exchange falling due after July 30; this was later 
extended from time to time. Similar measures were 
taken in Belgium, Italy, Bulgaria, Austria, Turkey, and 
a number of neutral countries. 

Germany boasted that she had avoided the opprobrium 
of resort to a moratorium. This claim, however, can be 
admitted only with reservations. By a decree of the 
Bundesrat of August 6, 1914, the term for the payment 
of bills and checks was extended one month, and this 
was later extended from time to time until the follow- 
ing May. The civil courts were also empowered to 
extend the time for the payment of mortgages, and the 
pressure of public opinion forced creditors to be lenient 
in the collection of other debts. It is, therefore, incor- 
rect to say that there was no moratorium in Germany. 
It is not necessary to press this point, however, for it 
must be admitted that the measures taken in Germany 
to relieve the situation were very different from the 
moratoria adopted in other countries. The evil which 
the moratorium sought to meet was the locking up of 
securities, the freezing of hitherto liquid assets. The 

(from the oovernment ) of 50 per cent, of his loss; in communes 
of over 10.000 inhabitants the maximum indemnity to the owner 
was 8,000 francs, and in Paris it was 10,000 francs. 

37 



WAR COSTS AND THEIR FINANCING 

policy followed in Germany was to render the assets 
liquid again by providing institutions which should at 
once discount not only securities and commercial papers 
but even merchandise. The Reichsbank was first of all 
empowered to lend freely. The discounts rose from 
$200,000,000 on July 23, 1914, to $1,152,000,000 on 
August 15, although it should be pointed out that this 
sum included advances to the Government, which 
amounted for the first two months of the war to about 
$500,000,000. New credit institutions known as ^' loan 
offices " {Darlehenskassen) were organized to facilitate 
loans and extend the credit necessary to continue busi- 
ness. The necessity of postponing the time of payment 
was removed by making large issues of paper money on 
the basis of practically any security or commodity that 
could be pledged at a bank. The provision of means of 
payment did not work any magic in the ultimate good- 
ness of debts which were met in this fashion. The day 
of reckoning was postponed as truly as if by moratorium. 
When one takes into account the effects in Germany of 
the issue of paper money, the inflation, the rise of 
prices, and the further derangement of foreign exchange, 
one must conclude that the method of moratorium was 
much more scientific and greatly to be preferred. 

(2) Safeguarding gold reserves. — A second series of 
measures, which w^ere more or less common to all the 
belligerents, had to do with the safeguarding of the 
stock of gold within the country. In most of the Con- 
tinental countries the major portion of the stock of gold 
was in the possession of the central bank of issue. Conse- 
quently one of the first acts of Government was to relieve 
the central bank of the necessity of redeeming notes 
in gold — that is, to suspend specie payment. This was 

38 



READJUSTMENTS AT OUTBliEAK OF WAR 

done in the case of the Bank of France (August 5), of 
the Reichsbank of Germany (August 1), of the Bank of 
Russia (July 27/August 9), and of the Imperial Austro- 
Hungarian Bank (August 5). By this means the dissi- 
pation of the gold reserves of the countries was pre- 
vented and these were held intact for the period after 
the war when normal relations among nations would be 
resumed. In England the suspension of the Bank Act 
of 1844 was authorized by the decree of August 6, but 
the Bank of England did not in fact take advantage of 
the permission to issue its notes without cover beyond the 
legal reserve. The peculiar position held by England 
in the world of international trade and finance made it 
particularly desirable that there should be no interfer- 
ence with the free movement of gold into and out of 
that country. England was hard put to it before the 
war was over to maintain specie payments in fact as well 
as in name, but by one means or another she was able 
to preserv^e the form at least until after the war.^ This 
was an achievement compared with which the avoidance 
of a moratorium, real or apparent, in Germany was a 
mere bagatelle. 

The stocks of gold in the central banks of the five 
principal belligerent countries in July, 1914, and on 
December 31 of each year following are given below.'' 
Not only did these central banks with the exception 
of that of Austria-Hungary maintain their reserves, but 
with the same exception they increased them. One of 
the most unprecedented and unpredictable occurrences 
of the war was the surrender by the citizens of these 

' An embargo was finally placed on the export of gold by an 
Order-in-Council of March 29, 1910, to become effective after 
April 1. 

■^ Compiled from bank returns in Federal Reserve Bulletin, 
March, 1920, p. 334. 

39 



WAR COSTS AND THEIR FINANCING 



Gold Reserves in Central Banks of Belligerents 

{In millions) 



Year 



England 


France 


Russia 


Germany 


$190 


$830 


$800 


$340 


338 


799 


803 


499 


251 


968 


831 


582 


264 


653 


758 


600 


284 


640 


667 


573 


384 


664 




538 


444 


695 




259 



Austria- 
Hungary 



July, 1914. . . 
Dec. 31, 1914 

1915 

1916 

1917. . 

1918 

1919 



$255 

214 

139 

59 

53 

53 



countries of their hoarded gold to the banks in exchange 
for bank notes, even in some cases after the latter had 
begun to depreciate. Appeals were made to the people 
to exchange their gold for bank notes, and, to prevent 
the exportation of gold, laws were passed prohibiting it 
entirely or placing such transactions entirely under the 
control of the central bank. Germany was the first 
country to make a systematic and determined effort to 
increase the gold fund in the Reichsbank. Acts were 
passed penalizing transactions in gold at a premium and 
prohibiting its exportation. The publication of rates 
of foreign exchange was also forbidden. It was not 
enough, however, to keep the money in the country; it 
must be brought to the Reichsbank itself. To secure 
this result a campaign was carried on among the people 
to induce them to exchange gold or coin or jewelry for 
bank notes. A good account of this campaign was given 
by Ambassador Gerard in a speech to the New York 
Chamber of Commerce:^ 

Signs were hung up in the street cars saying, " He who 
koeps back a prold piece injures the Fatherland." Soldiers 
^^ew York Times Magazine, July 15, 1917, p. 14. 

40 



READJUSTMENTS AT OUTBREAK OF WAR 

were given a two days' leave of absence if they would produce 
a 20-mark gold piece. For that they were given a 20-raark 
note, just as good as the gold in Germany. School children 
if they produced a 10-mark gold piece wer^ given 10 marks in 
paper and a half holiday. In many of the theatres if a per- 
son paid for his ticket in gold he would receive a ticket good 
for another day. 

By February, 1915, the gold reserve of the Reichsbank 
had been increased to about $540,000,000, and by May, 
1917, when the highest point was reached, the reserve 
had been brought up to about $640,000,000. Part of 
this, however, was obtained from Belgium and from the 
banks of Austria-Hungary and Turkey. 

A similar procedure was followed in France. Exports 
of gold except by the Bank of France were forbidden. 
An appeal was also made to the people in July, 1915, 
following the example of Germany, to exchange gold 
for notes at the Bank. By October about $160,000,000 
had been added to the gold reserves, and by December, 
1915, these amounted to over $1,000,000,000. Over 
$400,000,000 in gold was shipped abroad by France 
and used as the basis for credits ; title thereto remained 
with the Bank, however, and the exported gold was car- 
ried as '^ gold held abroad " in its weekly statements. 
By the end of 1918 its gold reserves at home and abroad 
totalled over $1,095,000,000. 

In Russia even stronger inducements were held out 
to the people to exchange gold for notes in return for a 
premium. This resulted in considerable sums being 
surrendered to the Bank of Russia. Because of Russia's 
necessity of making payment for munitions to England 
the Bank shipped gold to London, beginning with 
$40,000,000 in November, 1914, but this was more than 
made good again by gathering in gold, so that by the 

41 



WAR COSTS AND THEIR FINANCING 

end of 1915 tlie reserves stood higher than they were 
before the war. The necessity for maintaining foreign 
exchange by shipments of gold only partly nullified the 
effect in the case of Russia of the collection from the 
people. 

In contradistinction to most of the other countries, 
the reserves of the central banks of Austria-Hungary 
and of Turkey showed a steady, and at first blush an 
inexplicable, decline. This was said by an angry deputy 
in the lower house of the Austrian Reichsrath to be 
causally connected with the increase in the reserves of 
the German Reichsbank. Certain it is that the two 
phenomena were synchronous. German Treasury bills 
were furnished to both Autria-Hungary and Turkey in 
exchange for gold from their central banks which was 
transferred to the Reichsbank in spite of their laws 
against the export of gold. With these Treasury bills 
Austria-Hungary and Turkey were enabled to purchase 
the munitions and supplies furnished by Germany. It 
is evident that the gold reserves would not last long in 
the face of the enormous expenditures that were neces- 
sary; as a matter of fact, they were pretty well 
exhausted by the end of 1915. 

(3) Issue of addiiional money. — Because of the 
temporary breakdown of the credit system and of the 
demand for immediate means of payment and media 
of exchange, it was found necessary in practically every 
belligerent country immediately after the outbreak of 
war to provide additional money. In some cases this was 
issued directly by the Government, but in most instances 
the duty of providing the needed media of exchange 
was entrusted to banks of issue. In time of panic, such 
as then prevailed, there is never enough actual cash to 

42 



READJUSTMENTS AT OUTBREAK OP WAR 

meet the demands of the people. Failure of the ordinary 
credit devices and methods throws a large part of the 
demand for media of payment to actual cash. Add to 
this the withdrawal of considerable sums, as a result 
of hoarding by frightened and thoughtless people, and 
there is created a real money stringency which can be 
met only by the issue of additional forms of currency. 
In England there was a considerable withdrawal of 
gold from the Bank of England, and the joint-stock 
banks in order to protect themselves hoarded their own 
stocks of gold. This bad example was followed by the 
people, and a difficult situation resulted. In this emer- 
gency the Currency and Bank Note Act of August 6, 
1914, was passed, which authorized the Treasury to 
suspend the Bank Act, that is, it provided that banks 
of issue should be indemnified against any liability on 
the ground of excess of issues after August 1. As the 
Bank of England did not take advantage of this per- 
mission, it has been claimed by many writers that no 
formal suspension of the Bank Act in fact took place, 
but that the machinery only was created. In fact the 
Bank Act suspension was rendered unnecessary because 
the GoA^rnment itself under the Currency and Bank 
Note Act undertook the issue of paper money direct. The 
Treasury, acting under its authority, issued one-pound 
and 10-shilling notes ($5 and $2.50) which were given 
legal tender quality. Postal money orders were made 
legal tender by the Act, in order to meet necessities at 
once in all parts of the Kingdom, but this provision was 
ended on February 3, 1915. The Government currency 
notes were issued through the Bank of England as the 
agent of the Treasury to the banks up to a maximum 
limit of 20 per cent, of their liabilities on deposits and 
covered accounts. The Treasury was secured by making 
the issues a prior lien on the assets of the bank. Inter- 

43 



WAR COSTS AND THEIR FINANCING' 

est was charged the banks at the current rate, and when 
advances were repaid, the sums went to a separate fund 
in the Bank of England called the Currency Note 
Redemption Fund. This Fund remained at about 
$142,000,000. The amounts taken by the banks were 
comparatively small. Although under the law they 
could have taken as much as $1,125,000,000, they actu- 
ally took only $65,000,000.^ Subsequently, however, the 
volume of the currency notes expanded greatly by direct 
issue in payment of war contracts, etc. By August 26, 
1915, the amount outstanding was $252,000,000; by 
November 14, 1917, it had risen to $956,000,000, and by 
January 1, 1919, to $1,616,200,000. 

The issue of these notes marked a new departure in 
British finance, for it was the first time that the British 
Government had resorted to an issue of paper money. 
There seems to be no doubt that in the first panic days 
after the outbreak of war there was a lack of actual 
money to meet immediate demands. When it is recalled 
that the lowest denomination of Bank of England notes 
is $25 and that there was a disposition to hoard the 
gold which made up the larger amount of the coin in 
circulation, a justification can be found for the issue 
of these currency notes by the Government. The criti- 
cism may be made, however, that although they were 
issued as an emergency measure, they were continued 
in existence during the whole course of the war. Not 
only that, but as time went on the Government made 
increasing use of them to meet emergencies. All the 
objections that can be urged against government paper 
money may, of course, be directed against these issues, 
and as a matter of fact they were urged both in Great 
Britain and elsewhere. In all fairness, however, it must 

® Hartley Withers, The War and Lombard Street, p. 83. 

44 



READJUSTMENTS AT OUTBREAK OF WAR 

be pointed out that these notes were not ordinary fiat 
money based purely on the credit of the Government; 
they were convertible and backed up by a gold reserve, 
although as the issues increased this became painfully 
small. As in the case of all excessive issues, whether of 
government paper money or bank notes or deposit cur- 
rency, the fact was reflected in higher prices, and so 
far as these notes contributed to that end, they must 
be condemned. Had provision been made for the issue 
of emergency notes of the same denominations by the 
Bank of England, in response to commercial demands 
rather than to Treasury needs, resort to government 
paper money might have been avoided. 

In France the paper currency was supplied by the 
Bank of France, which possessed a monopoly of note 
issues. These notes were protected by the general assets 
of the Bank, which held enormous gold reserves amount- 
ing generally to 75 per cent, of the outstanding issues 
and to over 50 per cent, of the note issues and deposits 
combined. There was a legal limit to the Bank's issues, 
but as this was always raised whenever the actual issues 
approached dangerously near to this point, it may safely 
be said that there was no real limit other than that 
dictated by good banking. The outstanding bank 
notes in circulation amounted on July 24, 1914, to 
$1,800,000,000. By October 1, 1914, they had been 
raised to $1,859,800,000 ; by the end of December they 
had passed $2,000,000,000; during 1915 they gradually 
increased until they reached $2,800,000,000; and the 
year 1916 saw the issues amount to $3,400,000,000, 1917, 
to $4,468,000,000, and 1918, to $6,050,000,000. The first 
big jump was made in response to the demand for actual 
cash which arose immediately upon the outbreak of 
war. The Bank was very liberal in granting loans and 

45 



WAR COSTS AND THEIR FINANCING 

also in making advances to the Government. As the 
Government demand was a non-commercial one, the 
issue of notes to meet it was not made in response to a 
legitimate business expansion, and it thus resulted in a 
real inflation of the currency with its undesirable effects 
of high prices, etc. The greater part of the issues was 
made to meet the needs of the situation as they 
developed. With the suspension of specie payments gold 
qaickly disappeared from circulation, and the resulting 
lack of currency was met by the issue of bank notes 
in denominations of 5 and 20 francs which had been 
prepared to meet such an emergency. The Bank also 
paid out about half of its silver coin, consisting of five- 
franc pieces. In the southwestern part of France local 
chambers of commerce issued one-franc and half-franc 
notes to meet the need for smaU change. 

Russia pursued much the same policy as had been 
followed in France. The legal limit upon the note 
issues of the Bank of Russia was raised on July 27/ 
August 9, 1914, to $600,000,000 from the pre-war limit 
of $300,000,000. On March 17/30, 1915, it was increased 
to $1,100,000,000; on August 22/September 4, 1915, 
it was further increased to $1,750,000,000, and later to 
$4,250,000,000. The issues, which stood at $817,000,000 
on July 8, 1914, were more than doubled a year later, 
standing at $1,898,500,000 on July 15, 1915 ; by Febru- 
ary 16, 1916, they were $2,903,000,000. The gold 
reserve, which in 1914 was 50 per cent, of the outstand- 
ing issues, had fallen on the last named date to 28 per 
cent. Gold payments had been suspended at the 
beginning of the war, however, so the note issues had 
now all the characteristics of inconvertible paper money. 

In the countries thus far described the issues of paper 
money or of bank notes were made in response to de- 

46 



READJUSTMENTS AT OUTBREAK OP WAR 

mands for additional media of exchange as they arose. 
Germany, however, adopted this expedient as part of a 
prearranged policy for financing the war. Immediately 
upon the outbreak of war the Reichsbank was relieved 
of the necessity of redeeming its notes in gold. A cur- 
rency panic ensued which the Government endeavored 
to meet by the issue of silver coins. As these too began 
to be hoarded, Imperial Treasury notes in denomination 
of 10 marks were issued. The most important agencies 
which were established for the purpose of supplying the 
people with the necessary currency were the loan offices 
(Darlehenskassen) . These were empowered to make 
loans on various forms of collateral which were not 
generally acceptable at banks, for which they gave to 
the borrower loan-office notes. At first these were issued 
in denominations of five marks and upwards, but after 
August 31, 1914, on account of the scarcity of small 
cliange, they were put out in denominations of one and 
two marks.^^ Although they were not full legal tender, 
they were receivable for all Imperial and State dues. 
No gold reserve was held for their redemption, but they 
were based upon the collateral which was pledged for 
the loans. In addition to the loan offices, there were 
also municipal loan bureaus which loaned to small 
merchants and handworkers at rates somewhat higher 
than the State institutions; finally, there were war 
credit banks which made loans to small tradesmen on 
stocks of goods or on personal notes with two endorse- 
ments. A perfect network of credit institutions was 
thus provided which made the desired advances to all 
who could furnish any sort of security. 

Austria-Hungary had much the same experience as 
the other Continental countries. Immediately upon the 

^° J. L. Laughlin, Credit of the Nations, p. 215. 

47 



WAR COSTS AND THEIR FINANCING 

outbreak of war the Currency Act requiring metallic 
reserves and imposing a tax upon excess issues not thus 
covered was repealed. There were runs on the Imperial 
Bank and hoarding of gold which necessitated to a 
certain extent the issue of bank notes. The issues of 
the Austro-Hungarian Bank, however, were not deter- 
mined solely by the needs of commerce, but were utilized 
also to make advances to the Government. The amount 
of bank notes in circulation, which stood at $425,800,000 
on July 23, 1914, had risen to $1,028,000,000 by the end 
of December. Excuses were given for these additions 
to the circulating medium on the ground of the increased 
activities of the Government and the need for additional 
notes to take the place of the hoarded gold. It is evi- 
dent, however, that the increase in the note issues was 
A'^astly greater than could be justified by either of these 
reasons. In fact, this was the beginning of a movement 
of inflation in the Dual Monarchy which went on at 
increasing speed throughout the whole course of the 
war. 

The movement of foreign exchange in the first few 
months after the outbreak of war seemed to follow an 
erratic course and caused apprehension in many quar- 
ters. Looking back upon the events of that period, it 
is now possible to explain them. The great creditor 
nations, England and France, and to a lesser degree 
Germany, made a determined effort to collect the debts 
due them. As these amounted to hundreds of millions 
of dollars, exchange rates on other countries immediately 
went in favor of those nations. Sterling and franc 
exchange in New York rose to unprecedented heights, 
as the United States was a debtor to an enormous 
amount to these countries. In consequence of the high 

48 



READJUSTMENTS AT OUTBREAK OF WAR 

rate of exchange, far above the gold-shipping point, a 
heavy movement of gold set in from the debtor to the 
creditor nations. The net exports of gold from the 
United States between August 1 and December 31, 1914, 
amounted to $81,719,000. This movement caused great 
anxiety not only to the countries which were losing the 
precious metal, like the United States, but also to those 
countries, like England, the rate of whose exchange was 
so violently affected. So great indeed was the anxiety 
felt in banking circles in London that a special commis- 
sion was dispatched to the United States to inquire into 
the desirability of measures to correct the existing 
situation. The worry was needless, however, for the 
high rate of sterling exchange was only temporary, and 
the movement of gold from the United States to Ottawa 
on English account was, and in the nature of things 
could be, only temporary. The shipment of gold came 
to an end when the outstanding indebtedness was 
liquidated or taken care of in other ways. To judge 
from the prevailing rates of foreign exchange, this 
movement would seem to have spent itself by the end 
of the year 1914. By that time the United States and 
other neutral countries had taken care of their current 
obligations, and, on the other hand, the belligerents 
began to buy largely of war materials and foodstuffs. 
Sterling exchange, which had steadily declined from the 
high point reached in August, fell in January below its 
par of $4.87. 

Like any organism upon which a serious wound is 
inflicted, the industrial, commercial, and financial world 
suffered a serious shock from the outbreak of war, but, 
like a living organism, it adjusted itself more or less 
quickly and with varying success to the new conditions. 

49 



WAK COSTS AND THEIR FINANCING 

Two periods of adjustment may fairly be distinguished. 
There Avas the first short, quick spasm of recovery from 
utter panic and dismay. This lasted possibly a week, 
during which the first temporary relief measures 
described above were perfected. Then followed a slower 
process of transition from a peace to a war basis. The 
period required for this larger adjustment was natur- 
ally different in different countries. In agricultural 
countries such as Russia or Austria-Hungary, which may 
be said to have had one hand on the plow and the 
other on the sword, the disorganization attendant upon 
the declaration of a state of war was not so serious. But 
in a highly industrialized state like England, and to a 
lesser degree in Germany, the disorganization was severe 
and far-reaching. France stood about midway between 
the two extremes, but to industrial disorganization was 
added in her case military invasion and the seizure of 
some of her most highly developed provinces. Another 
factor which differentiated the warring countries was 
the extent to which the adult male population was 
mobilized for war and withdrawn from productive 
industry. Here again France was the most crippled, 
followed by Germany in the second place, with England 
last. 

Because of these differences between the various 
belligerents, it is difficult to make any generalization, 
but it is probably safe to say that the necessary adjust- 
ments from peace to war conditions were made within a 
few weeks in the countries primarily agricultural and 
in the agricultural sections of the others. As their 
crops had been for the most part harvested, the work 
of the season was over and the calling of the men to 
the colors did not immediately affect production. In 
the industrial sections, however, industry and commerce 

50 



READJUSTMENTS AT OUTBREAK OF WAR 

liad met with a serious shock. Although commerce was 
greatly disturbed, it was never seriously imperilled, and 
within a month the British Navy had practically swept 
the seas of German cruisers. Insurance rates, which 
in the first panic days had been run up by Lloyd's as 
high as 80 per cent, of the value of the hull, were 
quickly brought down to normal. The importance of 
shipping was realized as so great by Great Britain that 
the Government early assumed the burden of granting 
war insurance on British vessels and later on their 
cargoes. On August 15, 1914, the rates were fixed at 
21/2 per cent, on hulls for three months. A couple of 
weeks later this was reduced to two per cent. This 
fact in itself is eloquent of the increased safety of Allied 
and neutral trade on the high seas. 

There were two obstacles to a complete and speedy 
adjustment of peace-time industry to war conditions. 
One of these was the very general belief that the war 
would be over in a comparatively short time, and that 
therefore it would not be necessary or desirable to make 
radical changes in the industrial or financial organiza- 
tion. In all the countries resort was had at first to 
bank advances and to short-term credit obligations. 
Germany was the first to place a long-time loan, and she 
did not undertake this until September, 1914. The other 
nations followed at intervals less or greater according 
to their financial strength. There was a general unwil- 
lingness to resort to vigorous and heavy taxation, which 
went so far in Germany as to lead the Chancellor to 
declare that no taxes whatever would be levied for 
carrying on the war. What was the use, since they 
expected to collect indemnities from a conquered foe? 
Even in England, the single country among the Euro- 
pean belligerents to impose heavy taxation during the 

51 



WAR COSTS AND THEIR FIXAXCING 

war, it was not introduced until Xovember, 1914, and 
then it fell far short of the necessities of the situation. 
Two factors contributed to this attitude. The first was 
a general belief that the cost of the war was so great 
that it could not continue more than a few months ; the 
whole finances of the Governments would break down 
under the strain if in the meantime a military decision 
did not end it.^^ Second, there seems to have been a 
general belief that a military decision would be attained 
within a comparatively few months, for it did not seem 
possible that the Central Powers could withstand the 
combination of nations which was weekly securing new 
adherents. 

The other factor militating against a reorganization of 
industry so as to make it ser^'e the single purpose of 
winning the war was the general insistence that there 
should be no interference with normal business. This 
belief found expression in the slogan '^ business as 
usual.'* Although it was founded upon a thoroughly 
fallacious economic analysis as to the nature of produc- 
tion and consumption, it nevertheless exercised a potent 
influence in the early months and even years of the 
war. Xot until shortened rations, lessened man power, 
higher prices, and grim necessity had forced the lesson 
home to the people did they begin to understand that 
war, especially on the scale of the World War, could not 
be taken on as an '' extra " in addition to carrying on 
business as usual. When that time arrived, the entire 
productive energies of the people were directed to the 

" Thus Edgar Crammond thoiiofht " economic exhaustion and 
the exhaustion of men and war materials will render it impossible 
for some of the principal belligerents to continue the conflict 
after Julv next." ("Cost of the War," Journal of the Royal 
Statistical Society. May, 1915. p. 364), See also L'Economiste 
franrals. January 30. 1915. p. 132. for a statement that the war 
would not last longer than seven months, 

52 



KEADJUSTMENTS AT OUTBREAK OF WAR 

task of winning the war, and non-essential industries 
were subordinated to this purpose. The length of time 
required to achieve such a unity of purpose and action 
differed, of course, in the different countries. Germany^ 
it may be said, was thus organized from the beginning. 
England required probably the longest time to make 
her adjustment complete and thoroughgoing, and the 
other nations took varying rank between these two. 



CHAPTEE III 

THE UNITED STATES AS A NEUTRAL 



Situation in the United States at the outbreak of the war in 
Europe — The expansion of foreign trade — How Europe paid 
its bills — The shipment of gold — Foreign loans placed in 
the United States — Purchase of American securities held 
abroad — Is New York to be the financial center of the 
world ? 



The disorganization in the European security market 
which followed the ultimatum of Austria-Hungary to 
Serbia was not without its effect on the United States. 
During the week preceding Friday, July 31, in spite 
of a deluge of selling orders from Europe, where condi- 
tions bordering on panic prevailed, the New York 
market stood its ground wonderfully. There was, how- 
ever, a steady decline in prices, which became more vio- 
lent on July 30. The evidences of an approaching panic 
began to show themselves, and to avoid serious trouble 
the New York Stock Exchange was closed on July 31,^ 
for the second time in its history, the first having been 
for ten days in 1873. Fortunately, speculation on the 
New York market had been for several years at low ebb, 
so that values were not inflated or long accounts stand- 
ing. Industry, too, was on a firm basis, for the depres- 
sion of the previous year had necessitated economy and 
brought business down to bedrock. The financial and 

* The Exchange remained closed until November 28, 1914, when 
it was opened for dealings in a restricted list of bonds. This 
proved very successful, and on December 11 a further step was 
taken. Permission was given to trade in a list of stocks which 
were not international in character at or above prescribed mini- 
mum prices. Four days later the Exchange opened entirely under 
a free market. 

54 



THE UNITED STATES AS A NEUTRAL 

business world, therefore, was in a good position to 
withstand the shock to credit which followed the out- 
break of the war in Europe. 

The credit situation, however, did not pertain to New 
York alone, but was international in character. The 
most serious condition which developed was the break- 
down in the international credit mechanism. London 
was the financial center of the world, and there focused 
a great mass of debits and credits. The floating 
indebtedness of the United States to London, which 
was ascertained by special inquiries, amounted to 
$580,000,000, and the debts of the rest of the world 
brought the total up to a much larger figure. In the 
first excitement and uncertainty of the crisis London 
demanded immediate payment of these obligations by 
its debtors. On the other hand, the London banks 
almost ceased the acceptance of further bills of 
exchange; indeed, with the complete disruption of 
foreign trade the supply of these bills fell off rapidly. 
The result was a veritable impasse. 

The debts owed to England, France, Germany, and 
the other nations of Europe by the United States matur- 
ing between August 1, 1914, and January 1, 1915, 
amounted to considerably over a half-billion dollars, 
of which $200,000,000 was immediately due. The most 
important single item was a debt of $80,000,000 owing 
by the City of New York to London and Paris and due 
between September 1 and January 1. New York City 
with its enormous budget has always been a large bor- 
rower and she had been in the habit of borrowing on 
her tax warrants in the cheapest market, which hap- 
pened the previous year to have been in France and 
England rather than at home. To meet this debt a 
syndicate was formed of New York bankers to which 

55 



WAR COSTS AND THEIR FINANCING 

New York City sold $100,000,000 of her six per cent, 
notes, receiving therefor $80,000,000 in gold or adequate 
exchange. These and other debts owing to London were 
liquidated within three months by the transfer of gold 
or credits. To meet this indebtedness large shipments 
of gold were necessary, as the paralysis of foreign trade, 
due to activities of German cruisers, prevented the 
export of commodities with which normally our foreign 
balances would have been met. Cotton, grain, and 
manufactured goods of various kinds piled up on the 
docks and congested the railways leading to the 
seaboard. 

Since the export of commodities was prevented 
and the stock exchanges were closed, there was 
practically only one method by which the balance 
of international indebtedness could be met, and 
tliat was by the shipment of gold. On July 28 
some $10,700,000 went out on the Eronprinzessin- 
Cecilie, but the ship was intercepted by wireless and 
returned to the nearest American port. Congress appro- 
priated funds to be sent abroad on the cruiser 
Tennessee for the relief of American tourists overtaken 
in almost every European port and unable to secure 
cash by reason of the foreign moratoria. For this pur- 
pose $35,000,000 in gold was shipped from New York 
in early August and its safe passage guaranteed to the 
United States Government by the warring powers. 
Sterling exchange, the normal rate for which is $4,866, 
soared to the high point of $5.50 by the end of July, and 
it was reported by the Commercial and Financial 
Chronicle to have climbed to the unprecedented price 
of $7 on August 1. 

The situation became chaotic and so fraught with 
danger in view of the large transfers that had to be 

56 



THE UNITED STATES AS A NEUTRAL 

m^de that the leading banks in New York agreed to fix 
an arbitrary rate of $5 for sterling exchange. This, 
of course, was only a temporary arrangement. A more 
effective method of dealing with the situation was the 
creation of a *' gold pool," as it was called; a fund of 
$100,000,000 in gold was subscribed by a number of 
national and state banks and trust companies in the 
reserve cities to guarantee the payment of American 
debts in London. Ten per cent, of the sum was collected 
and sent to the New York Clearing House, and part of 
this was deposited by the Clearing House at Ottawa to 
the credit of the Bank of England. Arrangements were 
made by which this gold fund was to be considered part 
of the Bank of England's gold reserve, so that the 
danger of shipping gold abroad would be eliminated. 
Deposits in the Bank of Ottawa were credited to the 
depositors' London account at the fixed price of $4.90. 
These measures relieved the tension in a marked degree, 
and the end of 1914 saw exchange on London and Paris 
practically back to normal, the sterling maximum for 
December being $4.89. 

The next difficulty that presented itself was the dis- 
posal of an unprecedented cotton crop amounting to 
fifteen million bales and worth some $700,000,000. The 
exports declined sharply, owing chiefly to the cutting 
off of the German demand. This placed the cotton 
growers and traders in a peculiarly difficult position, as 
the growing and marketing of the cotton crop is financed 
largely by means of credit. The South was on the verge 
of a financial breakdown because of the paralysis of the 
movement of cotton. Accordingly another pool was 
formed to lend up to $150,000,000 on cotton. Another 
movement, more or less sentimental in its inception but 
ultimately profitable to the participants therein, was 

57 



WAR COSTS AND THEIR FINANCING 

the ' ' buy-a-bale ' ' campaign, which resulted in the pur- 
chase of thousands of bales of cotton by purchasers in 
this country who stored them until prices reached nor- 
mal again. Relief to the general situation was also 
brought by the organization of a Bureau of War Risk 
Insurance by the Treasury Department, which facili 
tated the movement of our exports. The speedy asser- 
tion by Great Britain of her mastery of the seas soon 
permitted the resumption of ocean transportation and 
the export of commodities from the United States. 

By these various measures the country was able to 
meet successfully the difficult and complicated interna- 
tional financial problem. But the United States had 
its own troubles which it was forced to solve at home. 
The money markets and banks found themselves em- 
barrassed at the outbreak of the war, as always occurs 
in any panic, by a shortage of currency. This was met 
by the distribution through the Treasury of $141,228,000 
in emergency currency. Provision had originally been 
made for such an emergency issue in the Aldrich-Vree- 
land Act of 1908, and when the Federal Reserve Act 
was passed in 1913 the provision covering an emergency 
circulation, which would have expired on June 30, 1913, 
was extended one year. This currency had never been 
used, and was intended, as its name implies, simply for 
use in an emergency. The emergency occurred when 
the war broke out in Europe, and the Treasury promptly 
took advantage of the provisions of the Act. By 
October the total issues of emergency notes amounted to 
$369,000,000. With the opening of the Federal reserve 
banks for business in the following month these emer- 
gency notes were speedily retired. They had been of 
great service in the crisis which occurred before the 
Federal reserve system was put in operation, but after 

58 



THE UNITED STATES AS A NEUTRAL 

November the power to issue Federal reserve notes ren- 
dered this emergency currency of no further importance. 

One of the most important and far-reaching effects 
of the war was the enormous expansion of the foreign 
trade of the United States. After the first panic and dis- 
organization of our foreign commerce, orders began to 
pour in from Europe for foodstuffs, for raw material 
of all kinds, and finally for actual munitions of war. 
This increased demand was not due to the superior 
excellence or cheapness of our goods. It was caused 
rather by the necessities of the allied belligerents in 
Europe, who in the urgency of immediate action against 
a shrewd and well prepared foe turned to us for 
material assistance. The excess of our exports over 
our imports jumped from $470,653,000 in the year 
ending June 30, 1914, to $1,094,419,000 for the next 
12-month period. The following year saw this figure 
doubled, the favorable balance of trade for the fiscal 
year 1916 amounting to $2,135,600,000. Not only was 
the volume greatly expanded, but the character of our 
trade also underwent a remarkable change. The expan- 
sion took place, as might be expected, primarily in the 
group of commodities which ministered directly to war 
needs. A tabulation issued in August, 1915, selected 
the 14 most important groups of commodities of this 
nature and compared the exports for the preceding 10 
months with those of the corresponding 10 months before 
the war.2 rpj^^ four-fold increase shown in this table 
gives clear evidence of the relation between war orders 
and the expansion of our foreign trade, and proves how 
greatly our favorable balance was due to the sale of sup- 
plies to the belligerents. 

^Babson's Eeport of August 29, 1915. 

59 



WAR COSTS AND THEIR FINANCING 



United States Foreign Trade, W.\r and Pre- War 



Commodities 


10 months 
to June, 1915 


10 pre-war 
months 


]\Iiiles and horses 


873,000,000 S3, 500, 000 


Brass, bronze, etc 


155,000,000 6.000.00^ 


Automobile parts 


116,000,000 

21,000,000 

6,300,000 

93,000,000 

2,700,000 

88,000,000 

472,000,000 

120,000,000 

231,000,000 
47,500.000 
36,800,000 

366,000,000 


20,000,000 


Railway cars 


10,000,000 


Airplanes 


195 , 000 


Chemicals 


22,000,000 


Motorcjxles 


900 , 000 


Cotton goods . 


43,000,000 


Iron and steel. 


212 , 030 , 000 


Shoes and leather 


47,000,000 


Canned goods, meat, and 
dairy products 


124,000,000 


Wool and woolen goods 

Zinc, etc . 


3,900,000 
328 . 000 


Explosives 


5,000,000 






Total . . 


$1,798,300,000 


$497,823,000 







The meaning of this growth, in our foreign trade 
becomes more apparent with further analysis. The most 
striking feature was the enormous increase in exports to 
the ^Ye leading nations of the Entente Allies. From 
$927,000,000 in the fiscal year 1914, exports to these 
countries grew to $2,432,000,000 in 1915, and to 
$3,012,000,000 in 1916. On the other hand, the exports 
to the Central Powers, which in 1914 had been 
$370,000,000, declined in 1915 to $30,600,000, and in 
1916 almost disappeared, amounting then to only half 
a million. Part of this loss to the Central Powers was 
made up by indirect trade through the medium of the 
northern European neutrals, the exports to which more 
than doubled between 1914 and 1916, increasing from 
$150,000,000 to $328,000,000. Although the following 
year saw a decline in this trade to $215,000,000, it was 
still far in excess of the normal pre-war trade. 

60 



THE UNITED STATES AS A NEUTRAL 

The imports from the Entente Allies not only did not 
increase with their enlarged purchases, but even fell off 
in the two years following the outbreak of the war. 
Those from the northern European neutrals remained 
fairly steady. The belligerent countries were in no con- 
dition to pay for the commodities which they were 
taking from the United States by a return of their own 
raw materials or manufactures. All the energies of these 
belligerents were being directed into war activities, and 
normal trade was left to take care of itself as best it 
could. The result was that these purchases had to be 
paid for by other means than exchange of commodities. 
There were only three other ways by which such trade 
could be financed, namely, the shipment of gold, the 
sale of securities, and the establishment of credits. As 
will be seen, each of these methods was used in turn. 

The enormous trade balance piled up in favor of the 
United States was hailed with joy in this country as 
an index of our prosperity, but in some respects the 
trade developed as a result of war orders exerted an 
unfortunate influence upon our economic life. Manu- 
facturing industries were almost revolutionized. Those 
which could contribute to turning out munitions or war 
supplies expanded under the beneficent influence of 
orders which were placed almost regardless of price. 
With the diversion of labor and capital into war indus- 
tries, however, other enterprises suffered correspond- 
ingly. Building operations were almost at a standstill, 
and in spite of the rush of war orders, unemployment 
in many cities and industries was a serious problem. 
The favorable balance of trade had, indeed, one good 
aspect, for it indicated that the United States, so long 
a debtor nation, was now paying off its debts. But the 
stimulation of American business involved in these war 

61 



WAR COSTS AND THEIR FINANCING 

orders was not without danger. The development was 
a very uneven one, resulting in a relative depression 
of some industries and an over-development of others. 
The resulting trade expansion was clearly abnormal, 
based, as it was, not upon the exchange of commodities, 
but upon the borrowing capacity of our customers. 
Moreover, while the war orders were bringing a flood 
of gold and surface prosperity to the people of the 
United States, prices and wages, especially in the indus- 
tries affected, were being driven up to record heights. 
The prosperity was certainly being very unevenly 
distributed. 

There was another aspect of our foreign-trade expan- 
sion which has called forth endless comment. This was 
the opportunity opened to the United States to capture 
the foreign markets in South America and the East. 
The stoppage of German trade with those countries as 
the result of the driving from the seas of practically all 
German vessels and the reduction of British trade as 
the result of the absorption of Great Britain in war 
activities gave an unrivalled opportunity to the United 
States, but the people of this country were too occupied 
with the immediate profits to be made in filling war 
orders to endeavor to build up a new trade in foreign 
markets. Exports to South America, in fact, showed 
a decline from $122,000,000 in 1914 to $97,000,000 in 
1915. The following year, however, witnessed a signifi- 
cant increase to $176,000,000. Imports from South 
American countries, on the other hand, showed a rapid 
growth. From $221,000,000 in 1914, they increased to 
$259,000,000 in 1915, and to $390,000,000 in 1916. 
Much of this increase was in foodstuffs and raw 
materials which found their way ultimately to Europe, 
although some of them were consumed in this country. 

62 



THE UNITED STATES AS A NEUTRAL 

In other words, the expansion of our trade with South 
America, so far as it showed a growth, resulted from 
our acting as agent for European belligerents or 
because we were taking our pay from England and her 
allies in orders on South American countries for their 
goods. Great as was the expansion of our foreign trade 
during the first two years of the war, there was nothing 
in it to make us boastful of our achievements. Our 
sales to the belligerents and our capture of neutral 
markets came to us as one of the incidents of the war, 
and not because we had surpassed our industrial com- 
petitors in open market. 

While the people of the United States were enjoying 
extraordinary prosperity from the flood of war orders 
which poured in upon them, the Governments of Europe 
were devising ways and means of meeting these expendi- 
tures. As already indicated, there were three ways in 
which the European nations might pay for their enor- 
mous purchases: (1) by shipments of gold to cover the 
adverse balances of trade against them; (2) by return- 
ing American securities held by them and disposing of 
others in the United States market; and (3) by estab- 
lishing credits in this country. It is a matter of record 
that all three methods were used. The adoption of one 
did not preclude resort to the others; in fact, all three 
were sometimes used at the same time ; but in the main, 
emphasis was placed on each one in turn. 

As has been seen, the movement of gold was strongly 
from the United States to Europe in the first troubled 
and uncertain months after the declaration of war. The 
net loss to this country between August 1 and December 
31, 1914, was $81,720,000. By that time, and indeed 
before, the necessary commercial and financial adjust - 

63 



WAR COSTS AND THEIR FINANCING 

ments from a peace to a war basis had taken place, and 
England and her allies had turned to the United States 
to supply them with food, munitions, and other 
materials. The enormous exportations caused sterling 
exchange to fall lower and lower, until this finally 
reached the level of $4.49 on September 4, 1915. At 
these declining rates gold began to flow into this coun- 
try in ever increasing quantities, the net imports for 
the first six months of 1915 amounting to $140,694,000, 
and those for the next six months to $280,268,000. 

It is evident that there was a limit to the extent to 
which gold could be used to pay European debts. The 
outflow from England threatened to reduce the gold 
reserve of the Bank of England to an uncomfortably 
low point, and the Bank of France, from which some 
of the gold was drawn, was unwilling to see its stock 
further reduced. Indeed, bej^ond a certain point Europe 
could not spare the gold, and to demand it of her would 
cripple her banking and financial institutions. Nor, on 
the other hand, did the United States wish to be paid 
exclusively in gold ; its accumulation would simply mean 
the heaping up of idle reserves and the raising of prices. 
Large as were the importations of gold, they were after 
all only a drop in the bucket when compared with the 
excess of exports over imports. In 1915 the favorable 
balance of trade to the credit of the United States 
amounted to $1,094,420,000 and in 1916 it rose to the 
still more staggering total of $2,135,600,000. It is 
evident that the $420,000,000 in gold imported would 
not go far toward liquidating such a balance as that of 
even the earlier year. In normal times the charges to 
be met for foreign travel, interest on American securities 
held abroad, payments for freight, insurance, etc., would 
have amounted to some $500,000,000 or $600,000,000 

64 



THE UNITED STATES AS A NEUTRAL 

annually. Fully half of these payments were no longer 
being made, but even assuming no diminution in these 
items, they together with the imports of gold would 
have paid for only something over half of the net mer- 
chandise exports from the United States. It was still 
necessary for Europe to make payment for the excess 
of some $700,000,000 which she received during the 
fiscal year 1915. It was evident that other means than 
shipment of gold would have to be devised to meet these 
debts. 

The purchase of short-term obligations of foreign 
Governments was practically unknown to the people of 
the United States before the Great War. A few loans 
had been made to Canada, to China, and to some of the 
Latin-American countries, but they had been of a 
temporary character, and the securities had been easily 
parted with. The opportunities for investment had 
always been so profitable in the United States, and the 
need for capital so great, that there was very little 
inducement for an American investor to seek foreign 
enterprises. The West has been to the American capi- 
talist what the colonies have been to the British — the 
undeveloped region which offered returns larger than 
he could secure from his immediate neighborhood. 
There was, therefore, no necessity for American investors 
to look abroad for opportunities to place their capital, 
and there had consequently grown up in this country 
a prejudice against foreign investment which had to 
be overcome. 

At this time, however, the United States was called 
upon to finance foreign Governments. Canada and 
Argentina, which had previously secured the capital 
they needed in Great Britain, now turned for assistance 
to this country. Not only these and other countries 

65 



WAR COSTS AND THEIR FINANCING 

which had previously been in the habit of borrowing 
from Great Britain or France, but these two financial 
giants themselves were compelled to turn to the United 
States for loans. The foreign loans which were now 
placed in the United States, however, were not the 
ordinary offerings of foreign securities for investment. 
They were rather credits established to pay for com- 
modities purchased in the United Statss. It was neces- 
sary to make these loans or to see the war orders greatly 
curtailed. Goods were sold to the belligerent nations 
of Europe, and the United States then took its pay 
in the form in which it could be offered. An illustration 
of this may be found in the flotation of the famous 
Anglo-French Loan of $500,000,000 which was negoti- 
ated on September 28, 1915. A special clause in the 
loan agreement stipulated that the proceds were to be 
used exclusively for purchases in the United States. A 
large part of the loan was simply allotted to various 
munitions manufacturers in part payment for their 
sales to England and France, and in some cases at least 
these shares were later distributed by these companies 
as dividends among their stockholders. The loan con- 
sisted of five per cent, five-year bonds which were a 
direct obligation of the British and French Govern- 
ments. It was underwritten at 96 and sold to the 
public at 98. 

Although this was the largest of the foreign loans 
placed in this country during the first two years of the 
war, there were many other loans placed here by other 
Governments, as well as further loans by the British 
and French Governments. The following table shows 
the extent to which American capital was being drawn 
upon by investment in foreign short-term obligations 
down to the time of our own entrance into the war: 

66 



THE UNITED STATES AS A NEUTRAL 



Foreign Loans Floated in the United States, 1915-1917 
Great Britain: 

Anglo-French Loan of October, 

1915 $250,000,000 

Collateral loan of August. 1016.. 250,000,000 
Collateral loan of October, 1916.. 300.000,000 
Collateral loan of February, 1917. 250,000.000 

Bank credit, renewed 50.000,000 

Treasury bills sold 150.000.000 



Canada : 

August, 1915 $45,000,000 

March, 1916 75.000,000 

July, 1917 100,000,000 



$1,250,000,000 



220,O0D,000 



France : 

Anglo-French loan of October, 1915 $250,000,000 

American Foreign Securities loan 

of July, 1916 100.000,000 

Collateral loan of April 1, 1917.. 100,000,000 

City of Paris, October, 1916 50,000,000 

City of Bordeaux I ^^^.^ber, 

Mrsdllesj ^916 36,000,000 

Industrial credit through Bon- 
bright & Company 50,000,000 

Treasury bills sold 40,000,000 

Collateral loan through Roths- 
child on railroad bonds 30,000,000 

Acceptance credits through banks. 30,000,000 



686,000,000 



Russia: 

December, 1916, Dollar Loan $50,000,000 

June, 1916, through bank syndicate 20,000,000 

Treasury notes sold ^ 25,000,000 

Banking credits, priyate 7,000,000 

107,000,000 

Italy, 1916 25,000,000 

Germany 10.000,000 

Newfoundland 5,000.000 

Mexico 500 000 

Cuba 10.000 000 

Panama 2,911.000 

Santo Domingo 12,808.350 

Argentina. . . 32,720 000 

Bolivia 4,526,000 

Peru 1,000 000 

Norway 5.000 000 

Switzerland 5,000,000 

67 



WAR COSTS AND THEIR FIXAXCIXG 



China 12.500.000 

d ajDan 102,552,000 

Municipal and state loans to foreign countries.. .. 213,381,262 
Corporation, railroad, public-utilitv, and indus- 
trial foreign loans ' 206.436.675 



$2,912,395,287 



The placing of these large credits in the United States 
rendered less necessary the shipment of gold to this 
country by European belligerents. The direct influence 
of the Anglo-French Loan may be seen in the imports 
of gold into the United States during the first half of 
1916. This loan was paid in instalments as needed; 
by January 3, 1916, some three-quarters of the entire 
amount had been paid in. While these funds were still 
available, the gold imports fell off almost completely. 
This is clearly shown in the following table : 

Gold Imports Ixto the United States, 1916 

January. 1916 $15,100,000 

Februai-T. 1916 6.000.000 

March, 1916 9,800.000 

April, 1916 6,100.000 

May, 1916 17.300.000 

June, 1916 122,700,000 

As long as the credits under the loan were available, 
importation of gold was unnecessary, but when they 
were exhausted, gold imports were resumed. Although 
the inflow of gold steadied the rates of foreign exchange, 
this method could not be continued for any great length 
of time, and accordingly further large British and 
French loans were brought out in July, August, and 
October, 1916, aggregating $1,000,000,000. As these 
loans contained some novel features, they are worth 
recording. The French loan in July was obtained 
through an organization specially created for this pur- 
pose, namely, the American Foreign Securities Com- 

68 



THE UNITED STATES AS A NEUTRAL 

pany, with a capital of $100,000,000. This corporation 
obtained from the French Government its obligation 
to repay the principal in three years, together with 
collateral amounting to $120,000,000 made up of Gov- 
ernment securities of Argentina, Egypt, Spain, Switzer- 
land, Sweden, Denmark, and other Governments, some 
foreign industrial shares, and about $4,000,000 in 
American securities. The loan, in the form of three- 
year five per cent, gold notes, was taken over by the 
Securities Company at 94.5 and sold to the public at 98. 
This transaction was interesting as the first case in 
which a foreign Government placed collateral in order 
to attract American investors. 

This was quickly followed by the flotation of a 
$250,000,000 British loan in August on much the same 
terms. A syndicate headed by J. P. Morgan & Com- 
pany took over two-year five per cent, collateral gold 
notes of the British Government secured by collateral 
aggregating in value $300,000,000. It was underwritten 
by the syndicate at 98 and offered to the public at 99, 
at which price it was quickly taken up. The securities 
which were deposited as collateral by the British Gov- 
ernment were divided into three classes, each aggre- 
gating $100,000,000 : the first consisted of stocks, bonds, 
and other securities of American corporations; the 
second, of bonds of the Dominion of Canada and the 
Canadian Pacific Railway Company; and the third, of 
Government bonds of certain neutral countries, namely, 
Argentina, Chile, Norway, Sweden, Switzerland, Den- 
mark and Holland. So successful were these collateral 
loans that in October another British loan of the same 
general character for $300,000,000 was offered. This con- 
sisted half of three-year five per cent, gold notes and 
half of five-year five per cent, gold notes, secured by 

69 



WAR COSTS AND THEIR FINANCING 

direct obligation of the British Government and col- 
lateral to the amount of $360,000,000. The loan was 
managed by a syndicate headed by J. P. Morgan & 
Company, which offered the three-year notes at 99.25 
and the five-j^ear notes at 98.5. 

French municipal bonds of Paris, Bordeaux, Lyons, 
and Marseilles were sold in October and November. The 
first of these issues was very successful, being three 
times oversubscribed during the first day. But the sales 
of the subsequent issues were adversely affected by a 
warning of the Federal Reserve Board to banks against 
tying up funds in foreign treasury bills, which might 
not be readily marketable. This was such an unusual 
and important official utterance that two or three sig- 
nificant sentences deserve to be quoted.^ After com- 
menting on press reports as to its attitude towards the 
purchase by banks in this country of Treasury bills of 
foreign Governments, 

the Board deems it a duty to define its position clearly. . . , 
It would, therefore, seem, as a consequence, that liquid funds 
of our banks, which should be available for short credit facili- 
ties to our merchants, manufacturers and farmers, would be 
exposed to the danger of being absorbed for other purposes 
to a disproportionate degree, especially in view of the fact 
that many of our banks and trust companies are already 
carrying substantial amounts of foreign obligations, and of 
acceptances which they are under obligation to renew. The 
Board deems it, therefore, its duty to caution the member 
banks that it does not regard it in the interest of the country 
at this time that they invest in foreign Treasury bills of this 
character. ... In the opinion of the Board it is the duty 
of banks to remain liquid in order that they may be able to 
respond to home requirements. 

Enormous as were these loans, they were insufficient, 
^Federal Reserve Bulletin, December, 1916, p 661. 

70 



THE UNITED STATES AS A NEUTRAL 

even with the addition of the gold imports, to meet the 
debts which the European Governments were piling up in 
the United States through their purchases of munitions 
and other commodities. For the three years ending 
June 30, 1917, the excess of exports over imports in the 
United States amounted to $6,860,500,000. If there be 
set against this sum the gold imports, the loans which 
had been granted to foreign Governments, and an allow- 
ance for the usual charges against this country for 
interest, freight, insurance, foreign travel, etc., which 
might be said to amount in the aggregate to about 
$3,600,000,000, there would still remain an enormous 
unliquidated balance. It was evident that some further 
expedient would have to be devised to balance the 
accounts and to steady the rates of foreign exchange. 
This was found in the sale to the United States of its 
own securities owned by the debtor nations. 

The amount of American securities held abroad has 
been estimated by more than one writer, but probably 
the most authoritative statement is that of Sir George 
Paish, who estimated the amount of foreign capital 
invested in the United States in 1910 at about 
$6,000,000,000.* It is evident that here was an asset of 
no mean magnitude which might be used to liquidate 
the debts being created by European purchasers. There 
is no reason to suppose that any noteworthy change had 
occurred in these investments in the five years between 
1910 and 1914. That we had not paid off any consider- 
able sums in this period is shown by an examination of 
our trade balances. 

The annual payments which must be met by the 
United States on account of interest and other charges 
amounted to about $500,000,000, distributed as follows : 
* See Chapter I for details. 

71 



WAR COSTS AND THEIR FINANCING 



Interest on securities and other property incomes $175,000,000 

Freight charges 25,000,000 

Remittances by alien laborers living in United 

States 125,000,000 

Expenditures of American tourists abroad 150,000,000 

Insurance premiums and sundries 25,000,000 



$500,000,000 



These payments were met by the excess of our mer- 
chandise exports over our imports, supplemented by 
exports of gold or additional sales of American securi- 
ties. For the five fiscal years 1910 to 1914 the net mer- 
chandise exports of the United States were as follows : 



Merchandise Exports and Imports, 1910 to 1914 

(In millions) 





1910 


1911 


1912 


1913 


1914 


Total exports 

Total imports 


$1,744.9 
1,556.9 


$2,049.3 
1,527.2 


$2,204.3 
1,653.2 


$2,465.8 
1,813.0 


$2,364.5 
1,893.9 


Excess of exports 


. $188.0 


$522.0 


$551 . 1 


$652.8 


$470.6 



As the average for the five years is $476,900,000, it is 
evident that the excess of exports over imports merely 
sufficed to meet the current fixed charges against this 
country for interest and services, and did not go to 
reduce our foreign indebtedness. We may therefore 
conclude that this remained in 1914 at practically the 
same figure at which it stood in 1910. 

After the first panic rush to sell American securities 
in the last days of July, 1914, to which an end was put 
by the closing of the stock exchanges, there was probably 
little done in the transfer of foreign-owned securities 
to American accounts. But with the opening of the 
exchanges again in November and December some 
liquidation took place. Unwilling to let their gold go 

72 



THE UNITED STATES AS A NEUTRAL 

in unlimited quantities, and faced by an inability to 
market more than comparatively small amounts of their 
war loans in the United States, it became necessary for 
the European Governments to effect the transfer of 
American securities from their foreign owners to the 
United States. It is difficult to estimate the amount 
of securities returned to this country. The most exten- 
sive, as well as the most reliable, information on this 
subject is found in four inquiries made by L. F. Loree, 
President of the Delaware & Hudson Company. His 
inquiries were limited to railroad securities, but it has 
been estimated that four-fifths of Europe's holdings 
were of this class. The figures were obtained from 144 
railroads, or from all lines in the United States over 
100 miles in length. The results of Mr. Loree 's inquiries 
are shown in the following table: 



Ajmerican Railroad Securities Held Abroad, Par Value 

{In thousands) 



Type 


January 
31, 1917 


July 
31, 1916 


July 
31, 1915 


January 
31, 1915 


Preferred stock. . 

Second preferred 

stock. .... 


$91,006 

4,645 

258,730 

8,475 

56,752 

57,776 
672,969 

7,450 
49 

958 


$120,598 

4,858 

366,762 

9,070 

74,797 

85,166 
774,794 

7,783 
836 

■ 

958 


$163,130 

5,609 

511,437 

24,632 

160,229 

180,591 
1,150,340 

25,253 
29 

2,201 


$204,394 
5,558 


Common stock. . 
Notes 


573,880 
58,254 


Debenture bonds 
Collateral trust 

bonds 

Mortgage bonds. 
Equipment trust 

bonds 

Car trusts 


187,508 

282,418 
1,371,157 

20,233 


Receivers' certifi- 
cates. . 


998 






Total 


$1,185,811.4 


$1,415,623.5 


$2,223,450.2 


$2,704,402.3 



73 



WAR COSTS AND THEIR FINANCING 

A study of this table shows that in the half-year 
ending July 31, 1916, almost $500,000,000 of railroad 
securities were transferred from foreign to American 
ownership. The next 12 months saw a further transfer 
of about $800,000,000, but the ensuing 6 months end- 
ing January 31, 1917, saw only $230,000,000 of railroad 
securities thus transferred. It is evident that the well 
was running dry. 

Large as was the first sum, it was not sufficient to 
meet the increase in war purchases made by the 
belligerents from this country, and early in 1916 Gov- 
ernment pressure began to be applied to force the 
liquidation of American securities. The first plan 
devised was the British mobilization scheme, which was 
put into effect in January, 1916. This provided for the 
concentration in the possession of the British Govern- 
ment of American securities owned by British subjects. 
The owners were given several options: the first 
provided for the outright sale of the securities to the 
Government in exchange for British Exchequer bonds; 
the second provided for the loan of securities by 
those unwilling to sell them. In the latter case the 
owner was to deposit them with the Government for a 
period of five years after March 31, 1917, with an elec- 
tion on the part of the Government to purchase if it so 
desired, the owner meanwhile to receive the interest or 
dividends and a payment from the British Government 
for the loan of one-half of one per cent, on the par value 
of the securities. If the securities were purchased, the 
owner received the income and bonus to the end of the 
loan period, and then either received back the same 
type of security or its deposit value and a five per cent, 
bonus. 

France also asked its people who held American and 

74 



THE UNITED STATES AS A NEUTRAL 

other foreign securities to deposit them with the Gov- 
ernment on a three-year loan subject to the right of 
purchase by the Government, in which event the owner 
would be paid the highest price quoted for his security 
during the prior three months. The Government 
secured to the owners the full income from the securities 
while on loan with it and in addition a bonus of 25 per 
cent, of the income which the securities earned during 
that period. 

Germany also mobilized the securities of her citizens, 
both foreign and domestic. Through the agency of the 
loan-office banks the people were induced to pledge these 
securities for the purchase of war loans. Because of 
the British blockade it was never possible for Germany 
or Austria-Hungary to utilize their holdings of Ameri- 
can securities for the liquidation of foreign debts or the 
establishment of credits in the United States, although 
some were transferred to Holland and the Scandinavian 
countries, from which Germany purchased during the 
early years of the war. Germany during the first and 
second war loans in the fall of 1914 and spring of 
1915 liquidated her foreign securities heavily through 
Amsterdam.^ 

The securities thus mobilized by the belligerent 
Governments were used in part as collateral for loans 
placed in the United States, as in the case of the 
American Foreign Securities Company loan and the 
British collateral loans of August and October, 1916. 
Over $500,000,000 of securities, of which, to be sure, 

''Tn May. 1918, the Dutch Minister of Finance stated that, 
according to his best information, foreign securities to the value 
of 200,000.000 florins ($80,000,000, at the prevailinsr rate of 21/2 
florins to the dollar) had been imported into Holland since Janu- 
ary 1, 1917 {Commerce Reports, July 2, 1918, p. 20). It is prob- 
able that the early years of the war saw a similar movement 
even greater in amount. 

75 



WAR COSTS AND THEIR FINANCING 

only a small part represented investments in the United 
States, were tied up in this way as collateral. More 
important was the outright sale of these holdings in the 
American market and the application of the proceeds to 
new purchases or the liquidation of debt. 

The result of this double movement of gold and 
securities from Europe to the United States, together 
with the granting of loans and the sale of our products 
in enormous amounts at high prices, was the rapid 
repayment of our net debt to foreign countries. It may 
be estimated that by the middle of 1917 our net debt to 
foreign countries was practically extinguished. For the 
first time in its history the United States became a 
creditor nation. 

The position achieved by the United States as a creditor 
nation gave rise to statements and hopes that New York 
would now supplant London as the financial center 
of the world. A brief statement of the factors neces- 
sary to obtain and hold such a position will answer the 
question whether New York's financial supremacy was 
simply one of the temporary incidents of the war or 
whether it is to be permanent. 

It is clear that the position of the United States and 
of New York as its leading financial city was abnormal 
in 1916. To be sure, the United States had paid off its 
borrowed indebtedness and was piling up an enormous 
credit balance against the rest of the world. But to be 
a creditor nation is a very different thing from being 
the financial center of the world. To become such a 
center permanently several conditions must be met. In 
the first place the American people must invest large 
sums abroad. To do this they must not only have capi- 
tal to spare for that purpose, but they must be willing 

76 



THE UNITED STATES AS A NEUTRAL 

to invest it in other countries. The first question that 
must be answered, therefore, is whether the United 
States has any surplus capital which it can spare after 
meeting the requirements of domestic industries and 
new enterprises. Five years ago such a query would 
have been unhesitatingly answered in the negative, but 
the events of the war have shown that our powers of 
production are far in excess of our own immediate 
demands. The Census Bureau estimated the increase in 
the total wealth of this country at about $80,000,000,000 
in the eight years between 1904 and 1912, or from 
$107,104,193,410 to $187,739,071,090. This was at the 
rate of about $10,000,000,000 a year ; if we exclude the 
increase in the value of land, the annual gain was about 
$6,000,000,000. In a recent study David Friday con- 
cludes that the annual savings of the American 
people during the years 1916 and 1917 were about 
$11,500,000,000.^ It is evident, if these figures be even 
approximately correct, that there has been an enormous 
gain in productive capacity, even after making due 
allowance for the change in price level, which should 
furnish a fund with which we can finance not only our 
own requirements, but out of which we can also make 
loans to the rest of the world. 

At present the United States is in a peculiarly 
favored position. A large part of the abnormal earn- 
ings from war industries has gone into the improve- 
ment and enlargement of existing plants. Although the 
railroads were run down at the beginning of the war, 
they have since been in some measure rehabilitated, and 
in any case further requirements for equipment will 
not absorb the total available surplus capital. The 

® " War and the Supply of Capital," American Economic Review, 
ix, No. 1, Supplement, March, 1919, p. 92. 

77 



WAR COSTS AND THEIR FINANCING 

domestic demand for capital for investment may be 
indicated by the record of new security issues during 
the years 1910 to 1916, as shown in the following table : 

New Securities Issued in the United States 
{In millions) 





Corporate 


^Municipal, 
etc. 


Total 


1910 


$3,486 
3,577 
4,549 
3,180 
2,331 
1,962 


S320 
397 
386 
403 
466 
488 


S3, 806 


1911 


3,974 


1912 


4.935 


1913 


3,583 


1914 


2,797 


1915 


2,450 


1916 


3,421 


333 


3,754 



The balance of the $6,000,000,000 which it was esti- 
mated above was saved annually by the people of the 
United States and which did not take the form of corpo- 
rate and other securities, was invested in farm equip- 
ment, new houses and buildings, the establishment of 
individual businesses, etc. Even allowing for a consid- 
erable expansion in each of these items, it seems clear 
that with the increased production on the part of the 
people of the United States it would be possible to meet 
all home needs and yet have a surplus for investment 
abroad. 

The need of further capital for investment in Ameri- 
can industry is conditioned in large measure on the 
available supply of labor. Although the labor force has 
been increased by the addition of a great many women 
who formerl}^ were not engaged in gainful occupations 
or who were employed in domestic service, it is not 
certain that they will remain permanently in productive 
work. In this connection too it must not be overlooked 

78 



THE UNITED STATES AS A NEUTRAL 

that tlie man power of Europe from which we have 
drawn so largely in the past has been frightfully 
reduced by the war, and that we ourselves have erected 
a barrier against its free immigration by the imposition 
of a new literacy restriction. It may fairly be admitted 
in view of all these facts that the United States has 
the capacity for foreign investment and the ability to 
finance foreign trade. The further question arises 
whether its people have the willingness to utilize their 
resources in this way. 

Before New York can aspire to the position of world 
center, it must, as one writer puts it, " learn to think 
internationally, and not provincially. " Americans had 
never before the World War been willing to make any 
considerable investments in foreign countries. If, how- 
ever, we are to take from England her supremacy in the 
world's money market, this is the first condition that 
must be met. The situation has been well described as 
follows -.'^ 

In order permanently to fix a new place for ourselves, we 
must really become a world trade center. Time will show 
whether we are sufficiently developed for that. To ship to 
world markets and cultivate them permanently for our manu- 
factures and merchants, we must become lenders of wealth on 
a big scale. One of the most familiar axioms of international 
trade is that commerce will flow where the capital flows; one 
reason for European supremacy in overseas trade has been 
the tremendous outside investments made by England and 
France and more recently by Germany. Our people are not 
j^et educated to loan money abroad in large quantities; in 
spite of our apparently large loans in the past eighteen 
months, we cannot yet be called in a true sense an inter- 
national loan market. 



' Report issued by the Mechanics and Metals National Bank of 
New York, quoted in Annals of the American Academy of Politi- 
cal and Social Science, Xovember, 1916, p. 276. 

70 



WAR COSTS AND THEIR FINANCING 

A third factor that must be considered is the banking 
and credit machinery for financing foreign trade. In 
this respect London has an enormous advantage over 
New York. As has already been pointed out, London 
banks had for many years furnished banking accommo- 
dations to importers and exporters the world over. Ster- 
ling exchange was an international currency, and trans- 
actions between, let us say, an Argentine exporter of hides 
and a New York merchant would normally be settled 
by a draft drawn on London. The same thing was true 
of European and Oriental countries. Before the war 
foreigners engaged in import or export trade, even with 
the United States itself, seldom thought of settling their 
claims by means of New York drafts. Fortunately the 
passage of the Federal Reser^^e Act has made it possible 
for American banking institutions to utilize their credit 
in financing export trade. Great progress has also been 
made in the use of trade acceptances. Moreover, closer 
connection between the United States and foreign 
countries, especially mth those of Latin America, has 
been secured by the establishment of branches or 
agencies of American banks in those countries and by 
the opening in the United States of accounts by foreign 
banks or exporters in other countries. 

Whether these are mere temporary incidents of the 
abnormal conditions connected with the war, or are 
evidences of a permanent shift in international finance 
can be determined only by time. It may be said, how- 
ever, that New York has not yet successfully met the 
essential requisite to supremacy in the world trade, 
namely, that of developing an active discount market. 
In this respect London has yielded little to New York 
even after four years of war. In No^^mber, 1918, it 
was stated that the amount of acceptances of all the 

80 



THE UNITED STATES AS A NEUTRAL 

London banks against international business amounted 
to about $500,000,000, while those of the New York 
institutions totalled only $210,000,000.« Although the 
United States was able to loan great sums to the Euro- 
pean Allies and in large measure to finance the war in 
its later stages. New York had not been able to wrest 
from London the business of financing the international 
trade of tht3 world. The habits and trade connections 
and specialized training of a century or more were not 
lightly to be overcome. 

A more • fundamental factor in determining whether 
the people of tire United States will be willing to lend 
their capital to Europe permanently and on a large 
scale remains to be considered. The final test is after 
all whether larger profits are to be made in Europe 
or in the United States. Up to this time the returns on 
investments in this country have always been larger 
and European capital has flowed here to take advantage 
of the high rates. It is certain that opportunities for 
favorable investment have by no means been exhausted; 
but until they are, or until greater scarcity of capital 
in Europe causes rates of interest to be higher there 
than here, no permanent flow of capital seeking invest- 
ment can be expected to take place from the United 
States to Europe. As a market for cheap capital it is 
unlikely that London will yield its place to New York 
within any brief period of time. 

^ Leopold Frederick, quoted in Federal Reserve Bulletin, Janu- 
ary, 1919, p. 21. 



CHAPTER IV 



WAR EXPENDITURES 



The cost of past wars — Expenditures in the United States — 
Expenditures in Great Britain — Expenditures in France, 
Russia, and Italy — Expenditures in Germany and Austria- 
Hungary — Comparative estimate of total war expenditures. 

A discussion of the expenditures of the World War 
must necessarily deal to a considerable extent with esti- 
mates and guesses. Even in peace time the budgets of 
many of the belligerent countries left much to be desired 
in clarity and comprehensiveness, and war conditions 
did not improve this condition. Different methods of 
accounting in the various countries make comparisons 
difficult. Nor is it always easy to determine exactly 
what are war expenditures. In most of the countries 
certain ordinary expenditures which had previously 
been carried in the civil budget were transferred to the 
military side; in others the deficits caused by disor- 
ganization of industry and the falling off of revenue 
were charged up to war costs. Moreover, there have 
been imposed upon the ordinary budget many additional 
expenditures which are directly attributable to the war, 
such as allotments to the families of soldiers and sailors, 
pensions to families the breadwinners of which have 
been killed or disabled, the interest on the war debt, 
and the increasing cost of government itself due to the 
general inflationist policy of financing the war. Finally, 
not all of the countries have published complete or 
veracious statements of their expenditures. Great 
Britain. France, Italy, and the United States are the 

82 



WAii EXPENDITURES 

only countries that have published reports at all com- 
prehensive of their war expenditures and of the means 
adopted to meet them. In the case of the other 
countries reliance must be placed upon the votes of 
credit and war loans in estimating war expenditure. 

Before describing the actual expenditures made dur- 
ing the World War it will be interesting to note some of 
the estimates which had been made in advance as to the 
probable cost of such a conflict. Not a few such esti- 
mates were made during the first decade of the twentieth 
century, usually for the purpose of proving the impossi- 
bility of enduring the crushing costs. The average cost 
per man was usually set down at about $2.50 per day 
and the daily expenditures were figured out according 
to the number of men involved. The resulting total 
depended in considerable measure upon the imagination 
of the writer and his guess as to the number of par- 
ticipants who would be drawn into the conflict. An 
Austrian economist figured that a European war involv- 
ing France, Germany, Russia, and Austria-Hungary 
would cost about $18,000,000 daily. The French writer, 
Bloch, estimated the total daily expenditure for these 
four Powers and Great Britain at about $21,000,000 a 
day. A Swiss estimate made in September, 1914, after 
some hint had already been given as to the magnitude 
of the expenditures, set the total daily cost for the four 
nations first named at $37,500,000. A computation 
made at the time of the Balkan wars, with perhaps a 
more intimate knowledge of the possibilities involved, 
put the actual expense of a general European conflict 
at $55,000,000 a day. The expenditures of any one of 
the five principal belligerents exceeded any of these 
estimates except the last, and this was outdone by the 
combined expenditures of any two of these belligerents. 

83 



WAR COSTS AND THEIR FINANCING 

It is evident that even in the years immediately pre- 
ceding the outbreak of the World War the frightful 
financial consequences of a general European conflict 
were not appreciated. The improvements that had been 
made in the machinery of destruction, the possibilities 
of airplanes and submarines, the economic mobilization 
of whole peoples for war, and the enormous expense 
involved seem to have been glimpsed but dimly. From 
the standpoint of costs, as well as from almost every 
other point of view, the World War established a new 
record and occupies a unique position. The characteris- 
tic feature of the expenditures in this war was the 
prodigality and e^TU wastefulness with which they were 
incurred. As it was the first war in which modern 
technical science pitted machines and the output of 
factories against the forces of the enemy, the instruments 
and munitions of warfare were produced and destroyed 
with a reckless prodigalitj^ which ran the costs up to 
incredible figures. Moreover, the greater the perfection 
of science, the more enormous became the expenditure. 
As Professor Seligman wrote after our own entrance 
into the conflict :^ 



Not only are these munitions infinitely more costly than in 
former times, but also less durable; the bigger the gun, the 
shorter its life; the more elaborate the aeroplane, the greater 
the chance of its destruction; the better the sanitary methods, 
the more frequent the casting aside of uniforms; the more 
complete the application of science, the more rapid the ravages 
of war by both land and sea. Not only are the initial 
expenses immensely greater, but the sheer waste by destruc- 
tion grows "vvith every forward step in efficiency. The pres- 
ent war is not only the most expensive of all wars, but also 
the most wasteful. 

* E. E. A. Seligman, " Our Fiscal Policy," in Financial Mohili- 
zaiion for War {Chicago, 1917), p. 1. 

84 



WAR EXPENDITURES 

Financial efficiency as well as technical skill was also 
responsible for the huge outlays. The ease with which 
money was secured from the banks and from the public 
engendered a false optimism with regard to fiscal prob- 
lems and encouraged lavish expenditures. Economy was 
disregarded, for in matters so vital and so urgent no 
chances could be taken. The figures soon became so 
large that all sense of proportion was lost, and men 
spoke as glibly of billions as they had previously of 
thousands. 

In gauging the magnitude of the costs of the World 
War a comparison with the costs of the more important 
wars of the nineteenth century will be enlightening. 
These are stated in the following table, together with 
their duration and loss of life : 



Costs of Nineteenth 


Century Wars^ 


Wars 


Days 


Loss of Life 


Direct 
Monetary Cost 


Napoleonic, 1790-1815 

Crimean. 1854 


9,000 

730 

1,350 


2,100,000 
785,000 
656,000 


*$3,070,000,000 
1,700,000,000 

4,700,000,000 


American Civil, 1861-65 

North 


South 






2,300,000,000 

7,000,000,000 

2,535,000,000 
675,000,000 


Franco-Prussian, 1870-71 

France 


210 


280,000 


Germany 








995 

548 


9,800 
160,000 


Boer, 1899-02 


3,210,000,000 
1,250,000,000 


Russo-Japanese, 1904-05. . . . 


2,100,000,000 



2 E. Crammond, "Cost of the War," Journal of the Royal Sta- 
tistical Society, May, 1915, p. 361; F. W. Hirst, Political Economy 
of War, pp. 140, 147, 241, 274,276.^ 

*Increase in debt of Great Britain and France. 

85 



WAR COSTS AND THEIR FINANCING 

Although we were the last of the major belligerents 
to enter the war, the expenditures of the United States 
at once rivalled and soon surpassed in magnitude those 
of the other countries. Within a month after the 
declaration of war on April 6, 1917, the war expendi- 
tures were reflected in the monthly statements of the 
Treasury. These are shown for the two years 1917 
and 1918 in the following table, excluding advances to 
the Allies : 

Monthly Expenditures of the United States, 1917-1918 



Month 


1917 


1918 


Monthly 


DaUy 


Monthly 


Daily 


January 

February.. . 

March 

April 

May 

June 

July 

August 

September.. 
October. . . . 
November . . 
December . . 


$79,910,714 

75,844,498 

72,773,903 

81,599,598 

114,102,810 

134,304,040 

208,299,031 

277,438,000 

349,013,305 

465,045,360 

512,952,035 

611,297,425 


S2, 577, 765 

$2,708,406 

2,347,545 

2,719,986 

3,680,736 

4,776,801 

6,719,323 

8,949,613 

11,337,768 

14,904,690 

17,098,401 

14,904,690 


$715,302,039 

675,209,068 

819,955,367 

910,756,758 

1,068,203,026 

1,263,914,905 

1,259,782,599 

1,524,901,777 

1,624,583,411 

1,174,622,406 

1,655,051,004 

1,670,890,396 


$23,074,260 
24,114,610 
26,450,173 
30,358,558 
34,458,163 
42,130,497 
40,638,310 
49,190,380 
54,152,780 
37,892,335 
55,168,366 
53,899,690 



There is seen here the same steady increase that 
characterized expenditures in other countries, as the 
administrative and other machinery was created for 
training men, producing munitions and other war sup- 
plies, building ships, and organizing in manifold ways 
the resources of the nation for the winning of the war. 
It is not yet possible to tell exactly how this money was 

86 



WAR EXPENDITURES 

spent, as detailed accounts were not published during 
the war itself for obvious military reasons, and sufficient 
time has not elapsed since the signing of the Armis- 
tice to permit such publication. An approximate 
idea may be secured, however, from a statement of the 
expenditures by main groups for the three fiscal years 
1917, 1918, and 1919, together with those of the last 
peace year. These are given in the following table : 

Expenditures of the United States, 131G to 1919 



Estab- 
lish- 
ment 


1916 


1917 


1918 


1919 


Civil.... 
Military 
Naval. . 
Pen- 
sions, 
interest, 
etc 


$204,038,737 
164,635,576 
155,029,425 

200,799,260 


$234,649,248 
440,276,880 
257,166,437 

215,806,426 


$1,507,367,481 
5,684,348,623 
1,368,642,793 

406,173,369 


$3,230,890,248 
9,253,059,384 
2,009,272,389 

872,075,375 




$724,502,998 


$1,147,898,991 


$8,966,532,266 


$15,365,297,396 



The expenditures attributable to war may be calcu- 
lated by subtracting the sum spent during the fiscal 
year 1915-16, which may be regarded as normal, from 
the total expenditures of the following years, assuming 
the difference to be due to the war. This procedure 
shows war expenditures for the first three months of 
the war (April 6 to June 30, 1917) to have been 
$423,405,993; those for the fiscal year 1917-18 would 
be $8,242,039,268 ; and those for the fiscal year 1918-19 
may be placed at $14,312,821,707 or a total of $22,978,- 
266,968. If to these sums there be added the advances 

87 



WAR COSTS AND THEIR FINANCING 

to the Allies, the total outla}^ on account of the war 
made by the Federal Government for the fiscal years 1917, 
1918, and 1919 was $1,308,405,993, $12,981,474,018, 
and $17,790,386,957 respectively, or a total of $32,080,- 
266,968.2 

Large as were these sums, they had been exceeded by 
the plans of the Administration and the appropriations 
of Congress. The needs of the Government for the fiscal 
year 1918 were estimated at $18,775,910,955, and the 
appropriation bills passed in response to these estimates 
carried a total of $18,879,177,015, to which must be 
added $2,511,553,925 for contract work authorized. There 
is a wide discrepancy between these sums and the actual 
expenditures of $13,705,967,016 which were shown at 
the end of the year. The overstatement made in the 
estimates must be attributed to the belief that the 
resources of the country could be at once mobilized for 
war purposes. But it soon became evident that con- 
siderable time must elapse and much preparatory work 
be done before such enormous sums could be spent 
advantageously. Men who had laughed at the idea of 

^ The essential correctness of this calculation is shown by the 
following statement from a letter -written by the Secretary of the 
Treasury, Carter Glass, to Congressman Fordney, Chairman of 
the House Committee on Ways and Means, on July 9, 1919: 

" Expenditures for the war period amounted to $32,427,000,000. 
and of these more than $9,384,000,000, or about 29 per cent., 
were met out of the receipts and other revenues than borrowed 
money, although payment of nearly ha,lf of the income and profits 
taxes for the fiscal year 1919 has not yet been made, such pay- 
ment being deferred until the fiscal year 1920. In this calcula- 
tion no deduction is made of expenditures for loans to the Allies, 
which on June 30 amounted to $9,102,000,000. or for other invest- 
ments, such as ships, stock of the War Finance Corporation, 
bonds of the Federal land banks, etc. 

" If we assume that the expenditures of the Government on a 
peace basis would have been at the rate of $1,000,000,000 a year, 
or for the period under discussion of nearly twentv-seven months 
would have equaled $2,250,000 000. then we mav estimate the 
gross cost of the war to June 30. 1919. at $30,177,000,000." 

88 



WAR EXPENDITURES 

** a million men springing to arms between sunrise and 
sunset " were now to learn that it was equally impos- 
sible to spend a billion dollars a month for war purposes 
without adequate preparation. In fact, a full year was 
to elapse before the labor and industries of the country 
were fully mobilized, and the highest pitch of production 
was probably just being attained when the Armistice 
put an end to further preparations. 

It will be noticed in the table on page 86 that the 
month of November, 1918, showed the highest daily 
expenditures chronicled during the war, although 
December registered a greater absolute sum for the 
month. This was due to the cancellation of war con- 
tracts, which went on rapidly for two months. There- 
after expenditures showed an appreciable and steady 
decline. But the heavy expenditures of these months 
may fairly be attributed to the war, as they were caused 
by the cost of demobilization and similar charges which 
could not suddenly be discontinued. 

One of the striking features of war finance was the 

almost universal breakdown of constitutional budgetary 

procedure. Even in England, where the control of the 

purse by Parliament had been carried furthest, wide 

discretionary powers were given to the Executive to 

spend the money voted free from the usual control. Of 

conditions as they existed just prior to the war a recent 

careful study says:* '* The most characteristic feature 

of the appropriation system of Great Britain is the 

extent to which discretion is still left to the Executive 

in respect to the expenditure of the funds granted.'* 

The power of Parliament with respect to expenditures 

*W. F. Willoun^hby, W. W. Willouohby and S. McC. Lindsay, 
Financial Administration of Great Britain (New York, 1917), 
p. 27, 

89 



WAR COSTS AND THEIR FINANCING 

Avas theoretically unlimited, but it had always permitted 
considerable discretion to the Executive because it was 
believed that the latter was in a better position to deter- 
mine the details and to secure efficiency. During the 
war this principle was stretched to an extent undreamed 
of, and enormous votes of credit were granted without 
any determination as to the details of expenditures or 
control. A vote of credit is a " vote having for its 
purpose the placing at the disposition of the Ministry 
of a large sum of money in addition to that provided 
for the regular conduct of the Government, with which 
to meet some great emergency."^ In voting for war 
expenditures Parliament throughout the whole of the 
war made use of this method of granting votes of credit. 
In this way publicity with regard to the purposes and 
details of the military expenditures was avoided. It is 
therefore not possible to analyze the British war ex- 
penditures in detail. 

On the other hand, the gross accounts of the war 
expenditures were published regularly since the begin- 
ning of the war. These are shown below for the fiscal 
years ending March 31, 1914 to 1919, the expenditures 
of the last peace year being given by way of comparison : 

Expenditures of Great Britain 

1913-14 $987,465,000 

1914-15 2.802,367.665 

1915-16 7.795.791.888 

1916-17 10,990,563.550 

1917-18 13.481.107.025 

1918-19 13.896,505,940 

There is evidenced here a steady growth in expendi- 
ture which was utterly without precedent in former 
wars and which was as unexpected as it was unwelcome. 

' Ibid., p. 128. 

90 



WAR EXPENDITURES 

Month after month and year after year the reality out- 
ran the forecast; never did the budget equal the actual 
outlay. The imaginations of the Chancellors of the 
Exchequer did not seem able to cope with the increasing 
magnitude of the operations and the constant demand 
for new services. The defect, however, was not peculiar 
to Great Britain but was shared by all the belligerents. 
In the case of Great Britain large loans to her allies 
and to the British Dominions were in part responsible 
for the progressive increase, but primarily it was due 
to the putting of larger armies into the field and to 
increased production of munitions. Toward the end of 
the war, too, the effect of higher prices was reflected 
in the increased cost of all war operations. The increase 
is shown even more strikingly when the daily expendi- 
tures are compared. In the following table these are 
gi^^n by quarters for the period of the war : 



Daily War Expenditures of Great Britain by 
1914-1918 


Quarters, 


Period 


Days 


expenditures 


Quarter 


Per day 


Aug. 4-Sept. 30, 1914 . . . 
Oct l-Dec. 31,1914... 
Jan. 1-March 31, 1915... 
April 1-June 30, 1915 . . . 
July 1-Sept. 30, 1915 . . . 
Oct. 1-Dec. 31, 1915... 
Jan. 1-March 31, 1916... 
April l-June 30, 1916 . . . 
July 1-Sept. 30, 1916 .. . 
Oct. 1-Dec. 31, 1916... 
Jan. 1-March 31, 1917. .. 
April 1-June 30,1917... 
July 1-Sept. 30, 1917. .. 
Oct. 1-Deo. 31, 1917 . . . 
Jan. 1-March 31, 1918... 
April 1-June 30, 1918 . . . 
July 1-vSept. 30, 1018 . . . 


58 
92 
90 
91 
92 
92 
91 
91 
92 
92 
90 
91 
92 
92 
90 
91 
92 


$351,155,000 
930,490,000 
1,202,890,000 
1,292,365,000 
2,080,120,000 
2,127,100,000 
2,297,205,000 
2,222,800,000 
2,301,210,000 
3,305,585,000 
3,160,970,000 
3,356,435,000 
3,283,830,000 
3,505,905,000 
3,333,931,715 
3,174,515,000 
3,152,794,150 


$5,975,000 
10,115,000 
13,365,000 
14,200,000 
22,610,000 
23,120,000 
25,230,000 
24,425,000 
25,015,000 
35,930,000 
35,620,000 
36,885,000 
35,695,000 
38,105,000 
37,043,686 
34,884,780 
34,269,000 



91 



WAR COSTS AND THEIR FINANCING 

The end of the first fiscal year, March 31, 1915, saw 
the daily expenditures doubled, a process which was 
repeated in the second year. Every effort was made to 
cut down civil expenditures. The Road Improvement 
Fund was abandoned and appreciable savings were made 
in the Consolidated Fund service by suspending the 
sinking fund. But the remorselessly growing costs of 
the war quickty wiped out these economies and consti- 
tuted a demand for ever greater sums. By the end of 
the fiscal year 1916-17 the daily expenditures were over 
$35,000,000. The high point was reached in the last 
quarter of the calendar year 1917, when they averaged 
$38,100,000 daily. Although the expenditures for the 
fiscal year 1917-18 ran somewhat higher than those of 
the previous year, they did not exceed these as much as 
the rise in the general price level which occurred in 
the interval would apparently have justified. At this 
rate the war was costing Great Britain $1,455,000 an 
hour, or nearly $25,000 a minute. 

Such large expenditures could not be made without 
a certain amount of waste and extravagance, and sharp 
criticism was made in many of the British journals that 
a considerable part of them was extravagant, if not 
needless. The Spectator characterized the expenditure 
of the Government as "lavish"; the Nation called 
attention to the " profligacy of the Government's war 
finance "; the Economist affirmed that " the nation's 
effort is seriously weakened by the waste and muddling 
of which new examples appear week by week ' ' ; and, 
finally, Herbert Samuels, Chairman of the Committee 
on Public Expenditure, in a debate in the House of 
Commons on June 19, 1918, stated that the matter was 
approaching a " public scandal." Although allowance 
may be made for a certain extravagance of language in 

92 



WAR EXPENDITURES 

these criticisms, the diversity of authorities quoted sug- 
gests that there was some basis of fact ; indeed, a certain 
amount of waste and extravagance would seem to have 
been inevitable in view of the enormous sums involved 
and the haste and urgency with which they were raised 
and expended. On the whole, there was probably less 
real occasion for complaint in England than in most 
of the other belligerent countries. 

There occurred in France the same suspension of 
constitutional methods of procedure in voting and con- 
trolling expenditures as had taken place . in England. 
Votes of credit were granted by the Assembly practically 
in the amounts asked for by the Government, but no 
accounting was made in detail as to the purposes for 
which these sums were expended. Indeed, it may be 
said that one of the effects of the war was an almost 
complete disregard of regular budgetary procedure. 
M. Ribot in a speech in the Chamber of Deputies in 
1916 called attention to the fact that, owing to the 
sj^stem of asking for votes of credit at periodic intervals, 
quarterly budgets had practically superseded the annual 
budget. A year later he again referred to this point and 
promised that this would be the last occasion on which 
provisional credits would be asked, at least for civil 
expenditures; thereafter, he said, the Government in- 
tended to introduce an annual budget which would 
include all civil expenditures and all payments in con- 
nection with the public debt, so that only purely military 
expenditures would be covered by the quarterly credits. 
This pledge was carried out by the passage of the civil 
budget of June 27, 1918, which was the first budget 
passed as a whole since the beginning of the war. 

The disregard of constitutional provisions in the 

93 



WAR COSTS AND THEIR FINANCING 

voting of public money in France finds additional illus- 
tration in a statement presented to the Chamber of 
Deputies by the Chief Public Accountant.^ This showed 
that the credits voted for the 13 months ending January 
31, 1917, amounted to $6,473,400,000; of this amount 
the authorized expenditure amounted to $5,122,200,000, 
and the unauthorized to $1,351,200,000. The large pro- 
portion of unauthorized expenditure indicates the effect 
of war in breaking down constitutional safeguards and 
the extent to w^hich the Executive exercises its powers 
in war time in derogation of legislative control. The 
credits voted from August 1, 1914, to December 31, 
1918, are shown in the following table : 



Credits Voted in France, 1914-1918 

Aug. 1 to Dec. 31, 1914 $1,779,717,000 

Calendar year 1915 4,560,895,000 

Calendar year 1916 6,589,029,000 

Calendar vear 1917 8,374,185.000 

Calendar year 1918 9,217,961.256 

$30,521,787,256 



The expenditures of France show the same progres- 
sive increase as characterized those of the other belliger- 
ents. The average daily outlay remained fairly steady 
throughout 1914 and 1915 at about $12,300,000; for 
1916 the figure increased 66 per cent, to a daily average 
of $18,275,000; in 1917, an increase of 78 per cent. 
brought the daily average to $23,290,000; and in 
1918, up to November, the daily average was about 
$28,400,000. The monthly and daily expenditures, 
averaged on the votes of credit for each year, were 
as follows: 

« Economist, March 24, 1917, p. 553. 

94 



WAR EXPENDITURES 



Monthly and Daily War Expenditures of France, 1914-1918 



Year 


Monthly 


Daily 


Aug.-Dec, 1914 


$355,953,400 
380,074,775 
548,267,498 
697,850,000 
768,146,771 


$11,865,000 


1915 


12,669,159 


1916 


18,275,583 


1917 


23,290,000 


1918 


28,407,339 







These expenditures in France do not include the 
advances made by her to her allies, which were regarded 
more as investment than as expenditure, and which 
amounted to $1,547,200,000 during the period of the 
war. On the other hand, they include the civil expendi- 
tures, which may be estimated, on the basis of those 
for 1913, at about $5,000,000,000. If these be subtracted, 
the military costs are found to have been almost 
$26,000,000,000. 

An interesting analysis of the expenditures for the 
first three and one-half years made by the Budget Com- 
mittee of the Chamber is as significant for what it fails 
to disclose as for what it reveals. According to this 
report, the expenses of the war from its inception on 
August 1, 1914, to December 31, 1917, totalled $21,305,- 
000,000 of which sum $17,309,000,000 was used for mili- 
tary and other purposes directly connected with the 
prosecution of the war. Of this latter sum, some 
$15,200,000,000 was used for purely military purposes, 
that is, for waging the war against the Central Powers ; 
the remaining $2,000,000,000 was used for repairing the 
damage inflicted by the enemy, and to that extent it may 
be said to have anticipated some of the work of recon- 
struction and to have lessened the expenditures for 

95 



WAR COSTS AND THEIR FINANCING 

rehabilitation Avhicli will have to be faced after the 
war. The detailed table is as follows :^ 



Classification of War Expenditures ix France to Decembeb 

31, 1917 

Military $15,200,000,000 

Assistance to families of mobilized men 1,546.000,000 

Aid to orphans 6,000,000 

Assistance to invaded departments 2,000,000 

Urgent relief 25'.600.000 

Assistance to refugees 183.800.000 

Rehabilitation of invaded regions 93,507,000 

Reconstruction of landed prop- 
erty $53,480,000 

Reconstruction of industrial 

property 20,015,000 

Reconstruction of agTicultural 

property 20,012,000 

Repair of harbors and construction of means of 

communication 65,877,000 

Cultivation of abandoned areas 6,000,000 

Credits opened for reparation for damages in- 
curred through the war ". 180,000.000 

Total $17,308,784,000 

Extraordinary expenses of civil service 134,576.345 

Total war expense $17,443,360,345 

Public debt service 2.139,966.229 

Ordinary expenses of civil service 1,720,255.642 

$21,303,582,216 

The increased expenditure for the year 1914 was due 
almost entirely to mobilization and military operations. 
The burden of the war in the form of increased debt 
charges, expenditure for relief of soldiers' families or of 
refugees from the devastated areas, and other increases 
indirectly attributable to war were first reflected in the 
expenditures for 1915. During the rest of the war every 
item of expenditure in this classification showed a 
steady and progressive increase. Such a classification 

''Federal Reserve Bulletin, April, 1918, p. 275. 

96 



WAR EXPENDITURES 

is of interest in showing that the burden of war is spread 
in a multitude of charges over the whole body politic 
and body social, and is by no means confined to the 
strictly military outlays. 

There were three budgets in Russia, the civil, or 
ordinary, the extraordinary civil, and the extraordinary 
military. The first two of these seem to have been 
continued throughout the war and to have been voted 
regularly. The third budget was apparently withdrawn 
from legislative control, as details were never published 
with regard to military expenditures, nor was authoriza- 
tion asked for Azotes of credit. The ordinary expendi- 
ture did not show any considerable increase until the 
year 1917, when the expenditure for any one of the 
previous three years was just about doubled. Slight 
deficits had been shown every year, but not until 1917 
did these assume unmanageable proportions. As these 
deficits are attributable to the war, they may fairly be 
counted as war expenditures. The expenditures and 
deficits on tlie civil budget are shown in the following 
table : 

Civil Expenditures in Russia, 1914-1917 





Year 


Expenditures 


Deficit 


1914 


$1,464,000,000 
1,534,000,000 
1,587,000,000 
3,061,000,000 


$15,000,000 


1915 


137,000,000 


1916 . . . 


130,000,000 


1917.. 


1,191,000,000 







The war expenditures of Russia understate rather 
than exaggerate the military contribution made by that 

97 



WAR COSTS AND THEIR FINANCING 

country. This was due to several factors, namely, the 
very low pay received by the soldiers, the fact that 
the huge expense of transporting troops, equipment, and 
materials over the Government-owned railways was left 
to post-war adjustment, and the low cost of food, 
although this was in part offset by the higher cost of 
munitions. The war expenditures to the end of 1917 
are given as follows in a review of Russian war finance 
operations published in the official Viestnik Finansov:^ 

War Expenditures of Russia, 1914-1917 
Aug. 1 to Dec. 31, 1914 $1,273,000,000 

1915 4,687,450,000 

1916 7,633,500,000 

1917, to Sept. 1 7,102,407,500 

$20,696,357,500 

Although Italy delayed her entrance into the war 
until May 24, 1915, the beginning of her expenditures 
on war account may be said to have been practically 
coincident with that of the other belligerents, for the 
costs of armament and mobilization preparatory to par- 
ticipation were heavy. The war expenditures from 
August 1, 1914, to October 31, 1918, were as follows :^ 

War Expenditures of Italy, 1914-1918 

Aug. 1, 1914-June 30, 1915 $607,840,000 

July 1, 1915-June 30, 1916 1,670,300,000 

July 1, 1916-June 30, 1917 2,826,440,000 

July 1, 1917-June 30, 1918 3,946.920,000 

July 1, 1918-Nov. 1, 1918 1,345,120,000 

Interest on debt and outstanding liabilities 2,127,200,000 

$12,523,820,000 

The expenditures of Germany have not been published 
and therefore must be estimated from the votes of credit 

^ Quoted in Federal Reserve Bulletin, April, 1918, p. 276. 
^Economist, February 1, 1919, p. 136. 

98 



WAR EXPENDITURES 

and the popular loans. Because of the secrecy main- 
tained by the German Government regarding its finan- 
cial operations and the difficulty of securing the few 
facts that are published, these are practically the only 
data upon which an estimate may be based. 

An attempt was made during the first year of the 
war to effect a balance between expenditures and 
receipts by transferring the whole of the military 
and naval outlay, amounting in the fiscal year 1913 to 
$34-1,425,000, from the ordinary civil budget to , the 
extraordinary war budget. In this way not only was a 
deficit prevented, but Karl Helfferich, the Minister of 
Finance, was able to announce a surplus for the year of 
$54,750,000. The following March, however, in present- 
ing the budget for the fiscal year 1916-17, Dr. HelfPerich 
stated that owing to the great increase in the service 
of the Imperial debt, which was estimated at $575,750,- 
000, as against $317,000,000 in 1915, and $62,500,000 
in the last peace budget, even this formal balance could 
not be maintained. There was an increase in the ordi- 
nary budget of over $84,000,000 in expenditure as 
compared with 1915, and as the receipts had fallen off 
over $36,000,000, a deficit of $120,000,000 resulted. By 
the end of the fiscal year the debt charges had risen to 
$891,500,000, and in his budget speech of February, 
1917, the Finance Minister reported a formal deficit in 
the ordinary budget of $312,500,000 for the year ending 
March 31, 1918. This was based upon an estimated 
nominal expenditure of $1,337,500,000. 

The expenditures of the Imperial Government for the 
war are probably best estimated by taking the total 
credits granted by the Reichstag. As it was constitu- 
tionally necessary to have the money even for military 
expenditures first appropriated by that body, these votes 

99 



WAR COSTS AND THEIR FINANCING 

are matters of public record and the figures may be 
accepted as accurate. No details, however, have been 
made public as to how these sums were distributed 
among the different services. From the beginning of 
the war to the signing of the armistice, the Reichstag 
granted 12 votes of credit as follows : 



Votes of Credit ix Germaxy, 1914-1918 

August, 1914 $1,250,000,000 

December, 1914 1,250.000.000 

March, 1915 2.500,000.000 

August, 1915 2,500,000.00tj 

December, 1915 2,500.000,000 

June, 1916 3,000.000.000 

October, 1916 3.000.000.000 

Febriiary, 1917 3.750,000.000 

July, 1917 3,750.000.000 

December, 1917 3.750.000.000 

March, 1918 3.750,000.000 

July, 1918 3,750.000,000 

$34,750,000,000 

The actual expenditures, however, far exceeded the 
credits which had been granted. This significant fact 
was announced by Dr. Schiffer, ]\Iinister of Finance, in 
a speech to the German National Assembly at Weimar 
on February 15, 1919.^^. According to his statement 
the expenditures of the war were as follows : 

Wae Expexdittjees of Germany, 1914-1918 

1914 $1,875,000,000 

1915 5.750.000.000 

1916 6.650.000.000 

1917 9.875.000.000 

1918 12,125.000.000 

$36,275,000,000 

Treasury bills 1.500.000.000 

Credits to Allies 2.375.000.000 



Total $40.150,000.000 

Yossisiche-Zeitung, February 16, 1919. 
100 



WAR EXPENDITURES 

The existence of these large unauthorized liabilities 
shows that in Germany, as in most of the other Euro- 
pean belligerent countries, the necessities of the war led 
the Executive to override the constitutional provisions 
regarding the voting of credits and to disregard the 
requirements for legislative control. It is significant, 
however, that the sums thus involved were far larger 
in Germany than in any other country. The daily 
expenditures, according to the table just given, ranged 
from $12,250,000 in 1914 to $33,750,000 in 1918. These 
sums, however, did not include the unauthorized ex- 
penditures which it is not possible to distribute by 
fiscal years. In a later memorandum presented to the 
National Assembly,^^ Dr. Schiffer estimated that the total 
war expenditure of Germany amounted to $42,500,000,- 
000. A still later announcement made the startling 
disclosure that Germany's floating debt amounted to 
$18,000,000,000. This statement shows that the actual 
expenditures made during the war were far in excess 
of the officially admitted outlays and throws an interest- 
ing light upon German financial methods. 

In addition to this direct money outlay the war 
damages inflicted on German property were estimated 
at $1,124,000,000 and the claims of ship owners at 
$375,000,000, and $1,240,000,000 were stated to have 
been spent for the relief of families of dead soldiers 
by the states and municipalities. This latter expendi- 
ture had been defrayed during the course of the war 
by the local governments, but on the understanding 
that it would be assumed by the Imperial Government 
upon its conclusion. 

Huge, as is the sum stated above, it by no means 

'-^ Copenhagen despatcli, March 26, 1919, in Wasliington Post, 
March 27, 1919. 

101 



WAR COSTS AND THEIR FINANCING 

measures completely the real expenditures made on tlie 
war by Germany. In the case of the other nations the 
money outlay may be accepted as a correct statement 
of costs. Not so in the case of Germany. For years she 
had been preparing for this conflict and had collected 
immense stores of materials, munitions, and supplies 
of every kind. Part of the real cost, therefore, is repre- 
sented by outlays made in previous years, though it is 
impossible to state how much should be credited to 
these earlier expenditures. During the war, moreover, 
Germany exacted tribute from occupied territory. This 
was estimated in October, 1917, at $1,600,000,000 in the 
case of Belgium alone. The exploitation of the resources 
of the people of Belgium, Northern France, Poland, 
Rumania, and parts of Russia must also be counted in 
any comparison, as such items in other countries were 
paid for. The total value of supplies and materials and 
services used by Germany in prosecuting the war must 
therefore be reckoned at a figure considerably larger 
than the total votes of credit, huge as these were. 

In none of the other major belligerent countries 
was there greater secrecy concerning financial op- 
erations maintained than in Austria-Hungary. The 
figures for the civil budget, as to both expen- 
ditures and revenue, were published, but infor- 
mation regarding military expenditures was jeal- 
ously guarded. The report of the State Debt Control 
Commission which was published in November, 1915, 
showed the war expenditures to the end of 1914. 
For the first five months of the war the war costs to 
Austria were about $1,125,000,000, or about $225,000,000 
a month. Hungary paid during the same period the 
sum of $375,000,000, or about $75,000,000 a month. 

102 



WAR EXPENDITURES 

After that date all is conjecture. There was a complete 
breakdown of ordinary budgetary procedure and no 
budget was presented during three years. It was not 
until July, 1917, that the lower house of the Austrian 
Parliament was able to secure the observance by the 
Government of the constitutional provisions concerning 
the passage of the budget. Then the Chamber of 
Deputies in passing the provisional budget asked for by 
the Government insisted on fixing a maximum limit of 
$1,200,000,000 instead of leaving the amount indefinite. 
Up to that time the money had been raised and expended 
by Executive act alone. The Chamber insisted that 
future estimates must show the war expenditures 
separately from the civil budget and that a real effort 
must be made to cover the latter by means of taxes and 
other revenues. The expenditures of Austria-Hungary, 
both for the civil and military budgets, so far as they 
have been published, are given in the following table: 



Expenditures op Austria-Hungary, 1914-1918 



Fiscal 


EXPENDITURES 


year 
ending 
June 30 


Civil 


Military 


Total 


1915. ... 
1916.... 
1917.... 
1918.... 
1919.... 


*t$692,200,000 

*t651,600,000 

§800,000,000 

§1,000,000,000 

*1, 302, 000, 000 


*t$2, 164,000,000 

* 12,993,000, 000 

§3,200,000,000 

§3,400,000,000 

*3, 564, 400, 000 


$2,856,200,000 
3,644,600,000 
§4,000,000,000 
*4, 433, 900, 000 
*4, 866, 400, 000 


Total. 


$4,445,800,000 


$15,321,400,000 


$19,767,200,000 



* Budget estimates. 

t Estimates of Copenhagen Society for Study of the War. 

§ Writer's estimates. 

103 



WAR COSTS AND THEIR FINANCING 

There seems to be no doubt that the official figures 
of expenditures are in all cases too low, both for the 
military budget and for the civil budget, which includes 
the interest on the public debt/^ The Government seems 
to have published wilfully false statements as to the 
financial situation in order not to alarm the people 
unduly; consequently, all of the figures concerning 
expenditures must be taken with considerable reserve. 
But although these figures may not be accurate in them- 
selves, they serve to give a fairly correct picture of the 
progressive course of expenditures during the war. As 
every effort was made by the Government to conceal the 
real facts, the admitted increase shown in these figures 
is all the more impressive. 

It has not been possible to secure the expenditures of 
Austria and of Hungary separately for the period of 
the war. During the year 1918 the Austrian and 
Hungarian Parliaments were unable to agree upon the 
distribution of their common expenditures, and accord- 
ingly this was fixed by Imperial rescript at 63.6 per 
cent, for Austria, and 36.4 per cent, for Hungary. If 
this proportion be applied to the total joint expendi- 
tures in the table just given, it would appear that the 
expenditures of Austria amounted to $12,571,939,000, 
and those of Hungary to $7,195,300,000. 

It is now possible to bring together the figures for all 
the belligerent countries and to estimate the total 
expenditures for the war during the four and one-half 
years from August 1, 1914, to such dates after the sign- 
ing of the Armistice as the different belligerents closed 
their fiscal years. 

^^ The expenditures of the Empire covered only the three items 
of war, finance, and foreisn affairs. Austria and Hungary each 
had its own budget in addition to the Imperial budget. 

104 



WAR EXPENDITURES 



Gross Money War Expenditures of Belligerents 

United States .$32,080,265,968 

Great Britain 44,029,011,868 

Canada 1,665,570,032 

Australia 1,423,208,040 

New Zeal nd 378,750,000 

South African Union 300,000,000 

India 601,279.000 

Crown colonies and dependencies 125,000,000 

France ^='25,812.782,800 

Russia in Europe 22,593,950,000 

Italv 12.313,998,000 

Belgium 1,154,467,914 

Serbia , 399.400,000 

Rumania 1,600,000,000 

Greece 270,000,000 

Japan 40,000,000 

Other Entente Allie 500,000,000 

Total $145,287,690,622 

Germany $40,150,000,000 

Austria-Hungary 20,622,960,600 

Turkey 1,430,000,000 

Bulgaria 815,200,000 

Total. . $63,018,160,600 

Grand total ^ $208,305,851,222 

It should be noted that these are the gross expendi- 
tures and include the loans made to their allies by the 
United States, Great Britain, France, and Germany, 
amounting in all to about $22,072,214,125. If this sum 
be subtracted to avoid duplication, the net expenditures 
are found to be, in round numbers, $186,000,000,000.^ 

The figures given in this table are so stupendous that 

" This is the calculation of the writer, based upon the declared 
yearly expenditures. In February, 1919, the Chamber of Depu- 
ties estimated the costs of the war to France at $36,400,000,000, 
but these seem to have been the total gross expenditures during 
the war and not those attributable solely to the war itself. If 
this estimate were accepted the gross cost of the war would be 
raised to approximately 219,000,000,000 dollars and the net cost 
to 197,000,000,000 dollars. 

105 



WAR COSTS AND THEIR FINANCING 

they fail to carry a definite impression. If the annual 
national incomes of the more important nations be com- 
pared with their expenditures for the last year of war- 
fare, the real burden is made more comprehensible. In 
some cases the war was already costing more in a single 
year than the estimated pre-war income of the whole peo- 
ple, and in all the others except the United States it was 
approaching very close to this point. Only in the 
United States did there remain any appreciable resources 
which might yet be drawn upon to defray the costs of 
the economic reconstruction of the belligerent world. 
The following table gives these figures: 



National Inco:mes and War Expenditures of the Principal 
Belligerents, 1918 



Annual national 
pre-war income 



War expendi 
ture, 1918 



United States. . . . 
Great Britain. . . . 

France 

Russia 

Italy 

Germany 

Austria-Hungary . 



$38,000,000,000 
10,700,000,000 
7,300,000,000 
6,500,000,000 
3,000,000,000 
10,500,000,000 
5,500,000,000 



$18,000,000,000 
13,896,505,940 
10,671,000,000 
*9, 000, 000, 000 
3,946,920,000 
12,125,000,000 
3,560,000,000 



* 1917. 

In conclusion it should be noted that the costs thus 
far tabulated are only the direct money outlays of the 
countries involved. They do not take into account the 
indirect costs, such as destruction of property, depreci- 
ation of capital, loss of production, depletion of pro- 
ducers, interruption to trade, and similar economic 
losses.^* 

" For an estimate of the indirect costs see the author's " Direct 
and Indirect Costs of the Great World War" (Washington: 
Carnegie EndoAvment for International Peace, 1919). 

106 



CHAPTER V 

PAPER MONEY AND BANK CREDIT 

Large use of banks in financing the war — Direct issues of paper 
money in Europe — Services of the Federal Reserve System 
in the United States — Treatment of gold. 

One of the outstanding features of the World "War 
was the large extent to which belligerent Governments 
availed themselves of the assistance of the banks, directly 
and indirectly. Almost without exception the Govern- 
ment of each country involved turned to its great cen- 
tral banking institution for immediate advances with 
which to meet the costs of mobilization and the first 
military operations. Although these advances were 
generally paid back, in part at least, after the issue 
of the first war loans, the Governments continued to ask 
further advances from the banks, and the end of the 
war found practically every Government in debt to its 
banks for very large amounts. 

The problem presented to the banks was two-fold : In 
the first place they must provide the industrial and 
commercial world with needed accommodations, and in 
the second place they must give to the Governments all 
assistance possible for the vigorous prosecution of the 
war. In general, it must be said that the banks were 
well prepared for their tremendous task and that they 
acquitted themselves nobly. Methods differed somewhat 
in the different countries, but on the whole there is a 
striking similarity in the use made of the banks and in 
the way in which they responded to private and Govern- 
ment demands. 

107 



WAR COSTS AND THEIR FINANCING 

In Great Britain the extension of the bank holiday 
and the moratorium postponed the necessity for immedi- 
ate action on the part of the banks in granting the 
credit necessary to meet the obligations of their cus- 
tomers that were falling due. There was, however, an 
enormous mass of unliquid bills and acceptances which 
had to be taken care of, and the great problem confront- 
ing the banks, so far as concerned their responsibility 
to the industrial and commercial world, was to render 
these securities available as means of payment. Little 
was done until August 12, when the Government 
announced that the Bank of England, under Govern- 
ment guarantee against loss, would discount at the 
existing bank rate without recourse to the holder all 
approved bills accepted before August 4. By this 
operation the " frozen " bills were released and great 
assistance was given to British credit abroad. There 
was little new business, as the closing of the Stock 
Exchange, the interruption of ordinary business, and 
general unwillingness to engage in new enterprises sus- 
pended applications for additional credit. The move- 
ment of goods having been greatly reduced, there were 
few new bills of exchange presented for discount. This 
abnormal condition, however, did not continue long, 
as the energies of the nation were soon diverted to the 
production of munitions of war. Purchases of food- 
stuffs and other supplies from the United States and 
other countries brought foreign trade up to the pre-war 
level, so that it was not long before the discounts at the 
banks exceeded the amount granted before the outbreak 
of the war. 

As Great Britain depended so largely upon foreign 
sources of supply for food and for many of the 
materials of war, it was essential that foreign exchange 

108 



PAPER MONEY AND BANK CREDIT 

be stabilized and that 'tlie goods be secured \^itli as 
small an export of gold as was possible. Imports were 
increasing to enormous proportions, but exports were 
necessarily reduced as the productive energies of the 
nation were directed more and more into war channels ; 
hence the ordinary balancing of exports against imports 
could no longer be depended upon to maintain the rates 
of foreign exchange at par. Securities were used in 
part payment for the purchases abroad; soon after the 
exchanges were opened in November, 1914, the sale of 
American securities owned in England began, but this 
was not in itself sufficient to meet the steadily growing 
international balance against England and to maintain 
the normal rates of sterling exchange. The Government 
endeavored to meet the situation by restricting the 
importation of unnecessary goods and at the same time 
encouraging the exportation of British manufactures. 
But after all these expedients had been exhausted, there 
was still a balance against England which would have 
occasioned the exhaustion of the Bank of England's 
reserve had shipments of gold been permitted to follow 
their ordinary course. Owing to large purchases of 
supplies and munitions the rate of exchange began early 
in 1915 to run against Great Britain. The Bank's 
gold reserve was used, by redemption of its obligations, 
to pay exchange from $4,813 in March down to 
$4.7625 in July, but it was evident that a more far- 
reaching remedy would have to be taken to stop the 
decline. This was found in the floating of the Anglo- 
French Loan in the United States in October, 1915, by 
which time sterling exchange had fallen to the unpre- 
cedented point of $4.49.^ 

In still another way the Bank of England lent its 
^Chapter TIL " 

109 



WAR COSTS AND THEIR FINANCING 

assistance in financing the war. This was through the 
direct loan of its credit to the Government by the pur- 
chase of short-term Treasury bills. In the first days 
after the outbreak of the war, when commerce and 
industry were disorganized, the banks invested largely 
in Treasury bills at rates of interest as low as 3% per 
cent. Later, however, as industry became adjusted to 
war conditions and the demands of business men on the 
banks for loans became greater, the Government was 
forced to pay higher rates of interest on its Treasury 
bills, which were issued in large amounts. When the 
mass of bills on the market became unwieldy, the 
Government funded them into long term debts. In all 
these transactions the assistance of the Bank of England 
was of the greatest value to the Government. The 
burdens laid upon the institution were great, but it 
came through the ordeal of the war with heightened 
reputation. Although the British credit system has been 
severely criticized, and by none more than by English 
writers themseh^s, it has emerged from the most severe 
stress ever imposed upon it, not merely unscathed, but 
with its roots sunk deeper into the fabric of British 
business and with the increased confidence of the British 
people. 

Perhaps on no other single bank was a greater burden 
of responsibility laid than upon the Bank of France. 
The dislocation of industry was greater in France than 
in any other country except Belgium ; at the same time, 
owing to the very close relations between the Govern- 
ment and the Bank, the appeal of the Government for 
assistance was more immediate and greater than in most 
of the other belligerent countries. The demands upon 
the Bank for discoiints by private business began before 

110 



PAPER MONEY AND BANK CREDIT 

the actual outbreak of hostilities. In the week ending 
Saturday, August 1, 1914:, the amount of commercial 
paper discounted by the Bank increased to $608,000,000 
from $316,000,000 for the preceding week. So great, 
indeed, was the pressure that the bank rate was raised 
from three per cent, to six per cent. It is difficult to 
follow the operations of the Bank of France after this 
date for the publication of its weekly statement was 
discontinued and it was not renewed until February 4, 
1915. Subsequently, however, this omission was partly 
corrected by the publication of the Bank's condition on 
October 1 and 15 and December 10 and 24, The extent 
of the service of the Bank in meeting the needs of the 
business community is evidenced by the expansion of 
the discounts and private advances. By October 1 the 
discounts amounted to $895,200,000, which was the 
highest point recorded during the course of the war. 
Although this figure had fallen by October 15 to 
$871,800,000, the private advances had increased to 
$168,200,000, or $19,400,000 more than they were on 
July 31. Thereafter there was a steady decline in the 
amount of discounts, while the advances on securities 
fell off until December, 1915, after which they fluctuated 
around a considerably higher level. The reason for the 
decline in the amount of the discounts was the gradual 
liquidation of the paper affected by the moratorium. 
As this was reduced, its place was not taken by an 
equivalent amount of new paper. The prostration of 
business was too great for normal activities to furnish 
the usual amount of commercial paper. Probably the 
service of the Bank to the public is adequately measured 
by the amount of pre-moratorium paper it carried. This 
stood at $895,200,000 on October 1, 1914, but thereafter 
it steadily declined. By October 7, 1915, it was 

111 



WAR COSTS AND THEIR FINANCING 

$391,100,000, and on October 5, 1916, it had been 
reduced to $276,600,000. New discounts developed very 
slowly. On December 10, 1914, they amounted to only 
$42,600,000, and a year later, on December 9, 1915, 
they had grown only to $63,400,000. It is clear that the 
accommodation of the Bank to the public had been 
greatly lessened as a result of the war. 

The Bank did not curtail its loans ; it simply changed 
their character. The advances to the State, which had 
stood on July 31, 1914, at $41,000,000, increased by 
leaps and bounds. These stood on October 15, 1914, at 
$420,000,000 ; on April 15, 1915, they were $1,000,000,- 
000 ; by May 31, 1917, $2,100,000,000 ; and by October 31, 
1918, had reached the high mark of $3,430,000,000. 
It is needless to try to chronicle the successive advances ; 
there was a steady increase as time went on, with occa- 
sional temporary decreases after the subscriptions to the 
national loans were paid in. In contrast to English and 
American experience, the advances to the State occa- 
sioned not an expansion of the credit deposits, but an 
enlargement of the note circulation. These issues, which 
amounted on July 24, 1914, to $1,182,200,000, jumped 
to $1,859,800,000 on October 1, and from that time on 
continued to increase in a menacing manner. It is 
evident from what has been said that the increase in 
notes was not made in response to monetary needs of 
business, but rather in response to the fiscal needs of 
the Government. Failure to distinguish between these 
two needs led to a large and dangerous inflation of the 
currency in France with consequent depreciation of the 
money unit and rise in prices. The suspension of specie 
payments by act of August 5, 1914, and the grant of 
legal-tender quality to the notes gave to the issues of 
the Bank of France the character of inconvertible paper 

112 



PAPER MONEY AND BANK CREDIT 

money. Great as were the services of the Bank of 
France to the country, the very magnitude of advances 
to the State has been the measure of the inflation of the 
French currency. Although a certain addition to the 
circulation medium was called for in the first days of 
panic and readjustment the subsequent inflation cannot 
be explained on the ground of monetary necessities. 

The Bank of Russia was closely affiliated with the 
Government and in that relation served principally the 
needs of the State. A legal limit was placed upon its 
note issues, which were permitted to exceed the cash 
held by the Bank by a fixed amount of $150,000,000. 
As cash there was counted not only the gold and silver 
in the vaults of the Bank itself, but also the deposits 
maintained in the chief financial centers of Europe. 
The fiduciary issue was unimportant until the outbreak 
of the war, as the cash generally exceeded the note circu- 
lation. The last return before the war, July 21, 1914, 
showed that the Bank held $824,600,000 in gold and 
$36,910,000 in silver in its own vaults and $71,975,000 
on deposit abroad, a total of $933,485,000 against note 
issues of $841,600,000. On July 31, 1914, the legal limit 
of the fiduciary issue was raised to $750,000,000, and 
after the outbreak of war specie payments were 
suspended. 

The Bank of Russia began almost at once to increase 
its issue of notes, both for the accommodation of private 
borrowers and to meet the demands of the State. By 
the end of the year (December 29, 1914) the note issues 
amounted to $1,474,900,000 and the Treasury short-term 
bonds in the portfolio of the Bank to $255,700,000. 
From that time on there was a steady and rapid increase 
in both items in practically similar amounts. Repre- 

113 



WAR COSTS AND THEIR FINANCING 

sented by lines on a chart, they result in two almost 
parallel lines running steeply athwart the page in an 
upward direction.- In other words, the additional bank 
notes were issued almost exclusively for the purpose of 
discounting Treasury bills, and were used by the Gov- 
ernment to defray its own expenditures. The additional 
issues, therefore, were not made in response to an 
increased commercial demand. This was as clear a case 
of inflation as the issue of inconvertible paper money 
directly by the State would have been. By August 29, 
1917, when the Bank ceased to discount further Treas- 
ury bills, the account stood as follows : 



Gold in vault $668,400,000 

Notes in circulation 7,558.200.000 

Treasury short term bonds discounted 6,199,300,000 



The last published report by the Bank of Russia, made 
as of October 29, 1917, showed gold reserves of prac- 
tically the same amount, $667,000,000, but with note 
issues swelled to $9,458,500,000, an increase of almost 
$2,000,000,000 in two months. 

The annual reports of the Bank of Italy and of the 
other Italian banks of issue, those of Naples and of 
Sicily, segregate the total amount of notes issued to 
satisfy commercial needs and those issued on account 
of the State. The following table^ gives the total classi- 
fied note circulation of the three banks of issue and of 
the Bank of Italy separately at the close of each calendar 
year during the war: 

^ See chart in Federal Reserve Bulletin, December, 1917, p. 944. 
^ Compiled from tables in Federal Reserve Bulletin, April, 1918, 
p. 278, and in Economist, February 1, 1919, p. 136. 

114 



PAPER MONEY AND BANK CREDIT 



Bank Note Circulation in Italy 

{In millions) 



Decem- 
ber 31 



total 



For 
needs of 
Com- 
merce 



For 
needs of 
Govern- 
ment 



Total 



bank of ITALY 



For 

needs of 
Com- 
merce 



For 

needs of 
Gov- 
ern- 
ment 



Total 



1913 
1914 
1915 
1916 
1917 
1918 



$456.7 
440.2 
379.7 
499.6 
518.4 
916.9 



$147.0 

413.9 

510.8 

1,166.6 

1,433.2 



$456.7 

587.2 

793.6 

1,010.4 

1,685.0 

2,350.1 



$328.7 
286.3 
409.2 
442.4 



$103.8 
321.8 
366.1 
865.4 



$432.4 

608.0 

775.3 

1,307.8 



It is evident from this table, condensed as it is, that 
the expansion of their fiduciary circulation by the Italian 
banks of issue was made to meet the needs of the State 
rather than the commercial needs of private borrowers. 
Indeed, for the first year and a half there was a decline 
in the discounts of ordinary commercial paper, which, 
however, was more than made good by the discount of 
Treasury bills. Thereafter both showed increases, 
though this was much greater in the latter than in the 
former. 



In Germany the whole practice of war finance had 
been carefully arranged in advance. The policy fol- 
lowed was no temporary makeshift or hastily devised 
plan to meet an emergency ; it was rather a deliberate, 
methodical policy. The Reichsbank remained, as it had 
always been, the central source of credit, but in addition 
to this institution and the other large banks which sup- 

115 



WAR COSTS AND THEIR FINANCING 



plied the needed loans to the large manufacturing and 
trading establishments, loan offices {DarleliensJcassen) 
were established for the purpose of making loans to 
small traders, merchants, and others whose security 
would scarcely be acceptable at a commercial bank.* The 
loan offices were peculiarly a German institution, dating 
back to experiments made in Prussia in 1848. Based 
essentially upon the principle of the pawnshop, they 
were authorized to loan upon merchandise, securities, 
and other collateral which might not be acceptable at 
commercial banks, and made loans on five classes of 
collateral ranging from 40 per cent, of the market value 
of non-perishable merchandise up to 75 per cent, on the 
obligations of the Empire or of the German states. 
The loans were all made in loan-office notes (Darlehens- 
kassenscheine) , which were made receivable for all pub- 
lic dues although they were not given the legal-tender 

* Although this was the original purpose, these institutions 
came to serve increasingly the needs of the states and municipali- 
ties as the war continued; by the end of the year 1917 loans to 
these agencies amounted to $1,425,000,000. The following tahle 
shows the changes in the classes of borrowers {Economist, Ixxxvi, 
p. 979): 



Classes of Borrowers 



PER CENT 



1916 



1917 



Federal states and municipalities. . . . 

Savings banks 

Banks, etc _ 

Official war companies. . . . 

Commerce, transport, and insurance. 

Industry 

Agriculture 

Miscellaneous 



25.0 
23.3 

4.9 
10.5 
12.0 

3.0 

.7 

20.6 



Total 100.0 



74.9 
5.6 
2.1 
3.4 
4.1 
1.4 
.5 
8.0 



100.0 



116 



PAPER MONEY AND BANK CREDIT 

quality. Loans were granted in amounts as small as 
$25 for periods running from three to six months and 
were generally renewable. The interest rate was some- 
what higher than the bank rate, being about 61/2 per 
cent. 

The four private banks of issue were permitted to 
redeem their notes in those of the Reichsbank. The 
soundness of the note circulation which was furnished 
the German people during the war depended, therefore, 
in the last analysis upon the character of the assets 
which were behind it. 

Before the war one-third of the outstanding notes of 
the Reichsbank must be covered by cash and the other 
two-thirds by commercial paper. After the outbreak 
of the war, however, this provision was modified so that 
Imperial Treasury notes and loan-office notes were 
counted as cash, and the term '' commercial paper " 
was extended so as to include both Imperial bonds with 
a maturity of three months and Imperial Treasury bills 
with average maturity of about 30 days. In this circle 
of reserves and security one is forced back finally to the 
ultimate soundness of the securities held by the Reichs- 
bank and the loan offices, that is, the bonds and bills 
of the Imperial Treasury and the securities and mer- 
chandise placed by private individuals with the loan 
offices. The former are as good as, and no better than, 
the rest of the German debt. The latter, whatever their 
value at the time they were mortgaged, have undoubtedly 
shrunk in value with the deterioration of German busi- 
ness concerns. So far as they represent solvent con- 
cerns or foreign securities the value of which has not 
fallen, they have not, of course, lost in value, but such 
must be much the smallest proportion. 

It was the boast of Germany that she was able, prac- 

117 



WAR COSTS AND THEIR FINANCING 

tically alone of all the belligerent countries, to avoid 
a moratorium. This was done by the methods indicated, 
that is, by coining all forms of wealth into cash in order 
that everyone might have the means immediately of 
meeting his indebtedness. The appearance of the avoid- 
ance of a moratorium may have been secured, but ulti- 
mately the liquidation of the securities pledged will 
become inevitable. There was no difference in principle 
between the German and the English or French method. 
There was simply a difference in the period of time at 
which premoratorium engagements should be finally 
settled. History has now recorded its verdict as to 
which method was the better. Like most other phases 
of German military and financial preparations for the 
war, the German financial program was adapted to 
a short and victorious struggle but did not lend itself 
well to a prolonged war. 

The demand for discounts on the part of business 
houses began earlier in Germany than in England or 
France. German business houses seemed to sense the 
coming war or were informed of its approach, and they 
began in the latter part of July, 1914, to put their affairs 
in order. The total discounts of the Reichsbank, which, 
however, included advances to the Government, in- 
creased from $200,000,000 on July 23, 1914, to about 
$700,000,000 on July 31 and to $1,152,000,000 on 
August 15. The larger part of these early loans were 
undoubtedly made to meet the needs of industry and 
commerce, but the Government too called upon the 
Reichsbank to lend it large amounts. In the first week 
or two nearly $200,000,000 was required for mobilization 
purposes, and during the first two months of war it was 
estimated that the Government received some $500,000,- 
000 for military and naval purposes. On the other 

118 



PAPER MONEY AND BANK CREDIT 

hand, the Government had turned over to the Reichs- 
bank the war chest of $51,000,000 in gold against which 
the Bank was authorized to issue three times this 
amount in notes. 

As in the case of the other continental banks, the 
extension of credit was made by the issue of notes. As 
the loans of the Reichsbank to the State increased, so 
the volume of issued notes expanded. At the end of 
1914 the discounts stood at $984,142,000 and the note 
issues at $1,261,474,000; at the end of 1915, they stood 
at $1,351,475,000 and $1,729,480,000, respectively; at 
the end of 1916, $2,402,437,000 and $2,013,665,000; at 
the end of 1917, $3,649,025,000 and $2,866,935,000, with 
Treasury notes amounting to $326,195,000 on the same 
date; and at the end of 1918 the discounts and note 
issues were $4,167,725,000 and $3,122,600,000, respec- 
tively. Thus the average note circulation for 1914 was 
$729,500,000; for 1915, $1,352,250,000; for 1916, $1,171,- 
500,000 ; and for 1917, $2,500,000,000. At the same time 
the loan-office notes in circulation showed an equally 
steady expansion, from $192,000,000 at the end of 1915 
to $718,500,000 at the end of 1916, $1,566,500,000 at the 
end of 1917, and $2,527,000,000 at the end of 1918. The 
total notes in circulation on July 23 of each year were : 



Notes in Circulation in Germany 

{In millions) 



July 23 


Reichsbank 
notes 


Treasury 
notes 


Loan office 
notes 


1914 


$473.0 
1,328.5 
1,710.0 
2,157.5 
3,142.5 


$34.5 
72.0 
80.0 
85.0 
86.0 




1915 


i74 5 


1916 


318.0 


1917 


1,137.0 


1918 


1,896.5 







119 



WAR COSTS AND THEIR FINANCING 

The note issues expanded so greatly that the Govern- 
ment itself was alarmed and sought to restrict the use 
of paper money by encouraging the habit of settling 
accounts by means of checks and other credit instru- 
ments. The use of postal money orders was agitated 
and encouraged by financial journals, and the banks 
sought to educate the people in the use of checks. 
These efforts bore their fruit, and deposits at the 
Reichsbank rose from $236,000,000 on July 23, 1914, to 
$1,977,500,000 on July 6, 1918, these figures, however, 
including Government deposits as well as private 
deposits. In estimating the degree of inflation which 
took place in Germany the increase of the credit cur- 
rency must be taken into account as well as the issues of 
circulating notes. The note issues of the private note- 
issuing banks, on the other hand, remained almost 
stationary. These increased by only $15,000,000 between 
July 23, 1914, and June 30, 1918, the change being from 
$390,000,000 to $105,000,000. 

The greatest expansion of the currency in Germany, 
however, occurred after July, 1918. When the German 
retreat began, the people began a run on the banks just 
as they had at the beginning of the war. The events of 
this period are best described in a report made by Herr 
Havenstein, the President of the Reichsbank :^ 

There was a run on the bank, September 23-Oetober 23, 
unparalleled in its history. People feared a moratorium or 
the insolvency of the banks, and hoarding took place on a 
large scale. The total circulation increased 2,651.7 million 
marks [$662,900,000] in the period September 24-October 23, 
as against 734.0 million marks [$183,500,000] in the same 
period last year [1917]. In the quarter, July 1-September 30, 

^ Report of Herr Havenstein to the Central Committee of the 
Eeichsbank on lack of instruments of payment, Frankfurter 
ZeiUmg, Oct. 31, 1918. 

120 



PAPER MONEY AND BANK CREDIT 

the Reichsbank added 4,325.5 million marks [$1,081,400,000] 
to the instruments of payment, which far surpassed any pre- 
ceding quarter. The withdrawals of new currency from the 
Reichsbank equalled 1,493 million marks [$373,250,000] in 
the first three weeks of October, 1918. The net addition to 
the currency for the period, July 1-October 23, was thus 5,484.2 
million marks [$1,371,000,000] — the highest amount during 
any war loan. 

Unhappily the official printing press was unequal to the 
emergency owing to the calling of a number of its workers 
to the army and the absence of hundreds of others because of 
grippe. Early in October the towns were asked to prepare 
immediately notes up to 50 marks [$12.50]. By November 1 
over 400 million marks [$100,000,000] of this emergency 
money had been issued, and during the weeks following a 
similar amount was put into circulation. The coupons of the 
five per cent, war loan, due January 2, 1919, were declared 
by the decree of the Bundesrat to be legal tender. This 
amounted to 600 million marks [$150,000,000], which will be 
increased by another 300 million marks [$75,000,000] as soon 
as the eighth war loan is issued. 

The four private banks of issue augmented their output to 
the legal limit. 

It is evident from the operations of the Reichsbank 
and the loan offices that the assistance granted both to 
private industry and to the Government by the credit 
institutions of Germany took the form primarily of the 
issue of notes. As the Government needs expanded, 
additional sums w^ere put into circulation without any 
regard to the monetary demands of the community, but 
solely in response to the fiscal necessities of the Treasury. 
This confusion of functions on the part of the note- 
issuing agencies led to an enormous inflation of the 
currency with, its consequent depreciation and a rise 
of prices. The result was that the Government was 
forced to pay more for its supplies and services as the 
war continued, owing to the steady depreciation in the 

121 



WAR COSTS AND THEIR FINANCING 

value of the monetary unit. Germany slid rapidly 
from a would-be scientific system of credit into the abyss 
of practically fiat paper money. That this is not too 
strong a statement may be seen from the ratio of 
reserves to note issues. On July 23, 1914, the gold 
reserve amounted to $339,215,000 against notes issued 
to the amount of $472,720,000 and total liabilities of 
$718,700,000. On December 23, 1918, the gold reserve 
had increased to $565,655,000, but the notes had mean- 
while expanded to $5,281,080,000 and the total liabilities 
had grown to $8,536,040,000. The ratio of gold reserves 
to notes had therefore fallen in the interval from 71.7 
per cent, to 10.7 per cent., and the ratio of gold to notes 
and deposits from 47.8 per cent, to 6.9 per cent. 

As Austria-Hungary, the hotbed of the European 
conflict, declared w^ar on Serbia on July 28, 1914, its 
banks felt the shock to credit earlier than those in the 
other countries. There were immediately runs on the 
Imperial Austro-Hungarian Bank and demands by busi- 
ness houses for accommodation. These were met by the 
passage of a limited moratorium, which was later made 
permanent, and by authorizing the banks to refuse to 
pay more than three per cent, of the checks presented 
and three per cent, of their customers' current accounts. 
On August 5 the requirement that the Imperial Bank 
should hold a metallic reserve against notes issued was 
suspended, which meant the suspension of specie pay- 
ments. At the same time the publication of the Bank 
reports was prohibited. These were not published again 
until December, 1917, but as statements were then given 
which covered the earlier years, it is possible to trace 
in a general way the course of the intervening operations. 
These are shown in the following table : 

122 



PAPER MONEY AND BANK CREDIT 



Condition of Imperial Austro-Hungaei.\n B.\nk, End of Year, 

1913-1917« 

{In millions) 





1913 


1914 


1915 


1916 


1917 


Gold 


$248.0 
12.0 
52.3 

185.2 
62.1 


$214.0 

2.8 

25.1 

410.6 
678.9 


$139.0 
12.0 
13.2 

595.4 
658.6 

78.3 

46.8 

1,432.5 

54.6 


$59.0 

1.1 

11.7 

571.3 
685.6 

735.6 

324.3 

2,177.7 
85.0 


$52.8 


Foreign exchange 

Silver coin and bullion. . . . 

Discounted bills, warrants, 

etc 


12.0 
11.3 

564.4 


Loans on securities 

Advances to Austrian Gov- 
ernment .... 


685.8 
1,808.0 


Advances to Hungarian 
Government 






831.6 


Bank notes in circulation . 
Deposits 


498.7 
37.5 


1,027.0 

285.4 


3,687.9 
391.6 







The most striking thing about this table is the almost 
complete disappearance of the metallic reserve. Much 
silver coin was paid out in the early days of the war to 
supply the need for small coins, but these were soon 
withdrawn from circulation and hoarded by the people. 
No such dissipation of the gold reserve took place, as 
the Bank had been relieved of the necessity of redeem- 
ing its notes in gold and naturally did not pay it over 
the counter. Its disappearance was obviously the result 
of its utilization by the German Reichsbank either di- 
rectly by being added to its own reserve or indirectly by 
exportation to neutral countries on Germany's account, 
though a cleaner sweep could scarcely have been made 
if the Austro-Hungarian Bank had been looted outright. 
It is very significant that the gold reserves of the Bank 
of Turkey dwindled in similar fashion, while the reserves 
of the German Reichsbank showed a steady and continu- 

• Report of Imperial Austro-Hungarian Bank, December 7, 1917. 

123 



WAR COSTS AND THEIR FINANCING 

ous increase throughout most of the period of the war. 
Whatever the explanation, the result was the same. The 
gold cover of the Austro-Hungarian bank notes, which 
before the war was fixed by law at 40 per cent., was 
steadily reduced. A year later it was 22.9 per cent, 
at the end of 1915 it was 9.4 per cent., of 1916, 2.7 per 
cent. ; and by the end of 1917 it had sunk to the negli- 
gible figure of 1.6 per cent. At this point the note 
issues were practically inconvertible fiat money. 

The increase in the issue of bank notes took place at 
an even more rapid rate than the decline in the metallic 
reserve. As deposit banking was but slightly developed 
in the Dual Monarchy, the extension of banking credit 
took the form almost exclusively of the issue of bank 
notes. This is shown by the slight increase in deposits 
as compared with the enormous expansion of note issues. 
These stood at $425,800,000 on July 23, 1914, just before 
the outbreak of the war; by the end of 1915 they had 
risen to $1,432,500,000; of 1916, to $2,177,700,000; and 
of 1917, to $3,687,900, 000. The year 1918 saw the issues 
increase at an accelerating rate. In April they were 
$4,060,000,000; in July, $4,600,000,000; and by October 
1, $5,400,000,000. On January 23, 1919, the note issues 
had grown to the enormous total of $6,434,400,000. 
Excuses were found for these additions to the circulating 
medium first in the need of notes to take the place of 
the hoarded gold and in the increased activities of the 
State. Later it was asserted that more money was 
needed for circulation in the conquered territories of 
Poland and Serbia, and still later of Rumania. Finally, 
the need for a larger circulating medium because of 
higher prices was urged. Here is seen the real evil of 
a policy of financing a war by issues of paper money. 
Over-issue means inflation and a depreciation of the 

124 



PAPER MONEY AND BANK CREDIT 

paper-money units with consequent higher prices. Not 
only is the cost of living raised thereby to private indi- 
viduals, but the Government itself is forced to pay more 
for all its supplies. At the same time it sells its bonds 
and other obligations for a cheaper money unit the 
purchasing power of which is constantly declining. 
Such a policy is improvident when the Government 
itself issues inconvertible paper money; when it author- 
izes a bank to inflate the currency, the policy is suicidal. 
The depreciation of the Austro-Hungarian bank 
money may be shown by a few figures. The decline 
began almost immediately after the outbreak of the war 
and continued uninterruptedly ; by the end of December, 
1915, the krone showed a depreciation in Zurich of 
41 per cent. ; in New York, of 44 per cent. ; and in 
Amsterdam, of 52 per cent. At the same time the cost 
of living rose by leaps and bounds. A report of the 
Vienna Board of Trade showed that in July, 1915, 
prices were 86 per cent, higher than they had been a 
year before. The mad dance of inflation went on 
through the next three years at an even faster pace, 
and by the end of 1918 prices had reached heights that 
were reminiscent of the assignats during the French 
Revolution. The following table shows some typical 
prices as quoted at Budapest for November 12, 1918 : 

Commodities Wages 

Milk, per Hire [quart].. . $.40 Driver, per day $6.00 

Cabbage, per head 5.67 Coal shoveler, per day... 5.00 

Steak, per kilo [2.2 Day laborer, per day 4.20 

pounds] 4.00 Grave digger, per day... 

Other meat, per kilo 4.00 8.00-10.00 

Incomplete as this table is, it illustrates one unhappy 
result which always follows the depreciation of a 
currency through inflation. Although nominal wages 

125 



WAR COSTS AND THEIR FINANCING 

showed an enormous increase, reaching undreamed-of 
heights, they still lagged behind prices, so that there 
was a steady decline in real wages. B/ the end of 1918 
the political situation had become so desperate that the 
depreciated bank notes had practically ceased to serve 
the purpose of money, and trade had become mere barter 
of commodities. In NoA^ember, 1918, the Government 
announced that it would issue temporary bank notes in 
denominations of 25 and 100 kronen to meet the scarcity 
of currency which followed the general panic in the 
country. The frightened people had made runs on the 
banks to such an extent that the available supply of 
notes had been completely exhausted and payments were 
being made in war-loan coupons and Treasury bills. By 
the end of the year a complete financial collapse had 
taken place and there was widespread bankruptcy 
throughout the country. Retail trade in Vienna was 
ruined and panic permeated all economic activities. 
Prices were fantastic and trade had become a gamble. 

The other items in the bank statement given on page 
123 combine to show the complete subordination of the 
Bank's normal activities to the demands of the Govern- 
ment for aid in financing the war. It is impossible 
to say how much of the item " Discounted bills, 
warrants, etc.," were on private account and how much 
for the Government, but it is safe to say that by the 
end of the war practically all loans of the Bank were 
made against Treasury bills. Private commercial paper 
had virtually disappeared from the market, and in lieu 
of this the Bank's portfolio was filled with Government 
obligations. ' ' Loans on security ' ' were doubtless loans 
made upon war bonds and Treasurj^ bills to permit the 
borrower to subscribe to new issues of bonds. The 
Bank loaned up to 75 per cent, of the nominal value of 

126 



PAPER MONEY AND BANK CREDIT 

the bonds for this purpose at a rate of interest one-half 
of one per cent, more than the interest on the bonds. 
The former of these two items showed its greatest 
increase in 1914 and 1915 and the latter in 1914, after 
which periods they remained fairly constant. As a 
r-esult of these operations there was a great expansion 
in bank credit which played its part in the continuous 
inflation and consequent rise in prices. 

But the most significant feature of the statement is 
to be found after all in the two items of " Advances to 
the Government." These did not begin until 1915. In 
the first part of the war the calls upon the Imperial 
Bank were indirect. To procure funds to meet its needs 
the Government entered into an arrangement with the 
Bank by which it was to advance money in return for 
Treasury bills, which it agreed to sell to the public on 
commission. The first call was for $190,000,000. Treas- 
ury bills to this amount were issued to the Bank (of 
which Austria took $120,000,000 and Hungary $70,000,- 
000) whidb it then sold to a consortium of bankers, 
which in turn borrowed the requisite cash from the 
Bank on the security of these same bills. But the needs 
of the Government were too great to permit it to use 
the Bank only as a brokerage firm. It soon made direct 
appeals to the Bank itself for funds, which the Bank 
granted by discounting Treasury bills freely. These 
operations are reflected in the doubling of the item 
'' Discounted bills, warrants, etc.," between the end of 
1913 and 1914 and the ten-fold increase of the item 
" Loans on security," though it is not possible to 
separate the Government operations from those of 
private borrowers. The magnitude of the Treasury 
borrowings was so great, however, that most of the 
increase must be credited to Government operations. 

127 



WAR COSTS AND THEIR FINANCING 

The year 1916 and the following saw a still more direct 
utilization of the Bank's resources by direct advances 
to the Government. By the end of 1917 these amounted 
to $2,600,000,000. 

It is clear from even this brief summary that the 
normal commercial functions of the Bank were com- 
pletely subordinated during the course of the war to the 
financial needs of the Government. It had become 
simply a manufactory of credit and an issuer of fiat 
money. The gold reserve, originally back of its notes, 
had entirely disappeared, and the latter were based, so 
far as there was any security back of them, upon the 
Bank's holdings of Government securities. The assets 
of the Bank were as good as, and no better than, the 
credit of the Dual Monarchy. The solvency of the 
former was clearly dependent upon that of the latter. 
With the collapse of the political structure of the Empire 
the insolvency of the Imperial Austro-Hungarian Bank 
became inevitable. 

In addition to the vast issues of bank notes which 
were put out in all the belligerent countries by the 
central note-issuing institutions, several of the belligerent 
Governments added to the mass of currency by direct 
issues of paper money. Great Britain authorized the 
issue of currency notes in denominations of $5 and $2.50 
by the Currency and Bank Note Act of August 6, 1914, 
and made them unlimited legal tender. This constituted 
such a marked departure from previous British practice 
that it has been referred to as '' the currency revolu- 
tion."'' The issue of these currency notes steadily 
increased from $192,390,000 on December 30, 1914, to 
$515,625,000 on December 29, 1915; $2,750,720,000 on 

^H. J. Jennings, 'Nineteenth Century and After, November, 
1914. 

128 



PAPER MONEY AND BANK CREDIT 

December 27, 1916; $1,063,910,000 on December 26, 
1917; and $1,616,205,000 on December 31, 1918. As 
the coin and bullion held in the redemption account 
remained practically fixed at $142,500,000, the ratio of 
reserve to notes steadily fell until on the last named 
date it was only 8.9 per cent. 

Canada had issued Dominion notes before the war, 
amounting on June 30, 1914, to $114,182,100, against 
which the Treasury held $92,663,375 in gold. During 
the war these issues were almost trebled, the notes out- 
standing on March 31, 1919, amounting to $298,058,698. 
As the amount of Dominion notes issued increased, the 
security back of them diminished. The regulations cov- 
ering the issue of Dominion notes had permitted an 
issue of $30,000,000 of notes against a 25 per cent, gold 
reserve. Any further issue was to be covered by a 100 
per cent, reserve. By the Dominion Notes Act of 
August, 1914, the amount of notes that could be issued 
against a 25 per cent, reserve was raised to $50,000,000 ; 
under the provisions of the Finance Act of 1914 the 
Minister of Finance was authorized to issue Dominion 
notes to banks upon deposit with them of approved 
securities; and subsequent acts permitted additional 
issues under different conditions. Of the new notes 
some $23,000,000 was issued against deposits of gold; 
over $70,000,000 was issued to banks upon deposit of 
approved securities; some $16,000,000 was advanced to 
the railways; $50,000,000 consisted of advances to the 
British Government on its securities; and the balance 
was issued without additional security. As a result of 
this serious dilution of the currency, as well as of other 
causes, there has occurred in Canada the same rise in 
prices that has taken place in all the other countries. 
In view of the excellent banking system of Canada it 

129 



WAR COSTS AND THEIR FINANCING 

would seem that a resort to direct issues of paper money 
by the Government might have been avoided. 

In Australia the issuance of the fiduciary money in 
use in the Commonwealth had been taken over from 
the banks by the Government; the direct issue of notes 
by the latter, therefore, stands on a somewhat different 
footing from similar issues in other countries. In 1910 
the Commonwealth Treasurer was empowered to issue 
notes in denominations of $2.50 and up, which should 
be legal tender throughout the Commonwealth and 
redeemable at the seat of the Federal Government. 
Against these notes the Treasurer was to hold a reserve 
of gold amounting to 25 per cent, up to $35,000,000 and 
100 per cent, of all notes in excess of that amount. At 
the same time the circulation of state notes was prohibited, 
and a tax of 10 per cent, per annum was imposed on 
bank notes issued after the passage of the act. The 
provision as to reserves was amended in 1911 by provid- 
ing that the gold reserve need be only 25 per cent, 
irrespective of the amount of notes issued, and by the 
end of 1911 the Australian notes were practically the 
only credit money in circulation in the Commonwealth. 
Early in the war specie payments were suspended, and 
the redemption of the notes ceased for the period of the 
war. The note issues have shown a considerable increase, 
and as a result the gold reserve has formed a smaller 
and smaller proportion of the outstanding issues. For 
the period August to December, 1914, the total note 
issue amounted to $71,665,040; by December 1915, it 
was $159,184,250; by December, 1916, it was $221,920,- 
195 ; and in December, 1917, it was $239,506,345.» At 
the same time the gold reserA^e declined from 45.22 per 

' Official Yearbook of Common wealth of Australia, 1016, pp. 
706, 742; Federal Reserve Bulletin. April, 19 IS, p. 273. 

130 



PAPER MONEY AND BANK CREDIT 

cent, on December 27, 1913, to 40.27 per cent, on 
December 30, 1914 ; to 36.09 per cent, on June 30, 1916 ; 
and to 32.38 per cent, on May 30, 1917. 

If any of the countries that resorted to direct issues 
of paper money by the Government was justified in so 
doing, it would seem to have been Italy. In that country 
the taxes had already constituted a grievous burden 
before the outbreak of the war, and it was difficult to 
screw them up very much higher. The poverty of the 
people, moreover, made it impossible to secure the large 
amounts in popular loans which were obtained in other 
belligerent countries. The Government accordingly 
pursued the apparently easy method of issuing its own 
notes in payment of its expenditures. These issues grew 
rapidly until by the end of 1917 they amounted to 
$349,760,000. One year later, on December 31, 1918, 
they had increased still further to $430,800,000. 

Germany, not content with providing for the enlarged 
issue of bank notes by the Reichsbank noted above and 
creating a new form of money in the loan-office notes, 
also increased the issues of Imperial Treasury notes 
{Reichskassenscheine) . These notes were obligations of 
the Imperial Government, payable to bearer on demand, 
redeemable at the Reichsbank in cash, and acceptable 
at all public offices for public dues. At the time of the 
outbreak of the war the authorized issue was $60,000,000. 
Since these notes circulated as money and were held by 
the Reichsbank as part of its cash reserve, they may 
fairly be regarded as constituting direct issues of paper 
money by the Government. They were issued in 
denominations of $1.25 and upwards, and on August 4, 
1914, were made legal tender. The suspension of specie 
payments on the same day made them inconvertible. The 
amount of these notes in circulation was as follows : 

131 



WAR COSTS AND THEIR FINANCING 



German Treasury Notes in Circulation, 1914-1918 



July 23 


In Circulation 


In Reichsbank 


1914. . 


$34,500,000 
72,000,000 
80,000,000 
85,000,000 
86,000,000 


$8,360,000 

64,347,000 

104.020,000 

13i;310,000 

435,905,000 


1915 

1916 

1917 

1918 . . . 





An adequate appreciation of tlie services rendered by 
the Federal Reserve System in the United States during 
the war can be obtained only if American banking 
methods as they existed prior thereto are fully under- 
stood. In 1914 there were some 7,500 national banks 
with combined capital, surplus, and deposits of about 
$9,000,000,000, and perhaps 20,000 state banks, private 
banks, and trust companies with capital, surplus, and 
deposits of about $14,000,000,000. In spite of their 
name the national banks were essentially local in their 
business and independent of each other, being brought 
together only by the loose association of banks in the 
clearing houses. The national-bank system had been 
established at the time of the Civil War to provide a 
market for war bonds and to supply the country with a 
uniform currency. These services had been performed 
efficiently, but in the half century that had elapsed since 
1863 the country had outgrown the rigid and defective 
system then established. The most serious defects of 
our former national banking system have been summed 
up by a recent writer^ under the four heads of 
decentralization, inelasticity of credit, cumbersome 

® E. W. Kemmerer, The ABC of the Federal Reserve System 
^Princeton, 1918), p. 2. 

132 



PAPER MONEY AND BANK CREDIT 

exchange and transfer system, and defective organiza- 
tions as regards relationship with the Federal Treasury. 

The banks of the country were not only scattered 
geographically, but they were without effective union or 
leadership. In good weather each sailed on its own 
course; in storm each had to depend upon itself. If 
a crisis came and reserves were drawn upon, no banker 
could look to his neighbor for assistance because the 
salvation of each depended upon his keeping his own 
reserve intact. The reserves, moreover, were widely 
scattered and also immobile, in that they could not be 
quickly moved and massed at one place in time of need. 
This was peculiarly wasteful in a country like the 
United States where the currency demands of trade, 
commerce, industry, and agriculture alternate and vary 
from place to place and from time to time. The crops 
of the West and Middle West drain the eastern money 
market at one season ; the cotton movement of the South 
demands financing at another ; the shipping at seaboard 
cities makes intermittent and at times coincident de- 
mands in the East; and the industrial sections require 
attention the year around. 

The inelasticity of the bank-note circulation was 
notorious. Based as it was upon the deposit of Govern- 
ment bonds, it was limited by the size of the national 
debt and fluctuated inversely with the price of the 
bonds rather than directly according to the needs of 
commerce. Rigid regulations as to bank reserves had 
the effect of limiting also the elasticity of bank credit 
in the form of deposits. The reserve requirement limited 
banking practically to 75 per cent. ; lack of a rediscount- 
ing market tied up bank paper until maturity; the 
necessity of having liquid assets practically confined the 
extension of bank credits (at least in central reserve 

133 



WAR COSTS AND THEIR FINANCING 

cities, where the larger reserves were held) to *' call " 
paper collateraled by stock-exchange* securities. This 
tended to centralize banking in New York and to a less 
extent in Chicago and St. Louis. Wall Street had bank 
credit, but the farmer did not ; he had no ' ' liquid 
assets " to offer. 

The old banking system possessed also certain defects 
in the mechanism of domestic and foreign exchange. 
Although the clearing-house machinery was highl}^ 
perfected for the settlement of local checks, there Avas 
considerable loss of time and expense in caring for 
checks from distant points or drafts on foreign coun- 
tries. But perhaps the most obvious defect in the old 
system was the lack of correlation between the fiscal 
operations of the Government and the movement of 
commercial credits. According to the original theory 
the funds of the Government were to be kept in the 
independent Treasury and its branches, known as sub- 
treasuries. This theory, however, had been widely 
departed from, and at the end of June, 1914, the 
Government's funds were deposited in some 1,581 
national banks as well as in the Government's own 
vaults. Even this dispersion of the Government funds 
did not altogether remedy the earlier evils of complete 
periodic withdrawal of cash from circulation, and on 
the other hand it led the depository banks to rely 
unduly upon the Secretary of the Treasury for relief in 
times of financial pressure. 

This SA^stem had been modified by patchwork legisla- 
tion, but it remained for the Federal Reserve System to 
place the American banking system upon an entirely 
new basis and to reorganize the machinery so as to 
adapt it more adequately to the needs of the twentieth 
century. It must be regarded as providential that the 

134 



PAPER MONEY AND BANK CREDIT 

system was got into running order within tiiree months 
after the outbreak of the World War. 

The Federal Reserve System, which was designed to 
unify the national and state banks and trust companies 
throughout the United States into an integrated financial 
organism, became operative in November, 1914. The 
country was divided into 12 districts, in each of whicli 
was established a Federal Reserve Bank situated in the 
logical banking center of the district. All national 
banks were required to become members of the system, 
and state banks and trust companies were urged to join. 
The capital of the Federal Reserve Bank in each district 
was subscribed by the member banks in proportion to 
their capital and surplus. At the head of the system 
stands the Federal Reserve Board at Washington. By 
means of this organization it has been possible to effect 
a centralization not only of administration, but also of 
reserves and banking power. The legal reserves of the 
member banks are kept on deposit in the Federal Reserve 
Bank of the district, although each bank also keeps a 
certain amount of ^^ counter cash " on hand, which, 
however, is not reckoned as a part of the legal reserve. 
This centralization of reserves permitted such efficient 
and economical use of them that it became possible very 
materially to reduce the reserve requirements of the 
banks. Those in the central reserve cities were per- 
mitted to reduce their reserves from 25 to 18 per cent, 
and finally in 1917 to 13 per cent. Similarly, the reserve 
city banks were permitted to reduce their reserves from 
15 to 10 per cent., and the country banks are now 
required to maintain a reserve of only seven per cent. 

The gold reserve was not only centralized, it was by 
this very fact also rendered more mobile. Federal Re- 
serve Banks were permitted to rediscount member banks ' 

J35 



WAR COSTS AND THEIR FINANCING 

paper, more liberality was granted in dealing with the 
outside public, and the greater use of trade acceptances 
and bank acceptances created a broader discount mar- 
ket for commercial paper, thus permitting a freer flow 
of funds from bank to bank and from district to 
district. In this way the localism and lack of coopera- 
tion of the old system has been effectually remedied. 
The final step in the mobilization of the gold reserves 
was taken by the establishment at Washington in May, 
1915, of a Gold Settlement Fund, to which each Federal 
reserve bank was compelled to contribute and maintain 
as a balance not less than $1,000,000. Settlement of 
balances between the Federal Reserve Banks is effected 
daily by a mere bookkeeping transfer of the gold held in 
the Fund, thus obviating almost completely the neces- 
sity of shipping money between Federal Reserve Banks. 

The foremost service of the Federal Reserve System 
has been the establishment of a real asset currency based 
on commercial paper created to finance trade and pro- 
duction and protected by a 40 per cent, gold reserve. 
Further issues are permitted in excess of this reserve 
in times of emergency, but they are penalized by a 
graduated tax which ensures their prompt retirement 
when the need is over. Issues are made in response to 
a demand evidenced by the creation of commercial paper 
and are retired upon liquidation of this paper, thus 
providing a maximum of elasticity. 

Other improvements were made which enabled the 
Federal Reserve System to be of much greater service 
to the business world than the national banking system 
could be. Among these were the development of trade 
acceptances and of '* open-market " purchases; the 
establishment of branch banks in foreign countries, of 
which there were 70 by July 1, 1919 ; the establishment 

136 



PAPER MONEY AND BANK CREDIT 

of a variable discount rate; and the development of 
'' commodity paper" whereby banks may advance loans 
on staple agricultural products properly warehoused 
and insured, a form of credit which saved the situation 
in the South in 1915 when England put cotton on the 
list of contraband. 

The assistance rendered by the Federal Reserve 
System both to the public and to the Treasury during 
the two years of war can be stated in briefest fashion. 
The period of two and one-half years between its organ- 
ization and the declaration of war by the United States 
was one of development of the Federal Reserve System 
to a point of efficiency which enabled it easily to assume 
and carry through the onerous and responsible tasks 
of war finance. The banks continued to grant the 
accoramodation necessary to enable business to meet the 
new and often untested demands upon it. In accord- 
ance with the Government's policy of conserving so far 
as possible the capital resources of the country for pur- 
poses that would assist in winning the war, the banks 
were urged to discourage the production of nonessentials 
and to limit loans for such purposes. In order better to 
carry out this principle the Capital Issues Committee of 
the Federal Reserve Board was created on February 1, 
1918, to pass upon applications for the issue of new 
securities. Although it was without specific legal 
authority, it was able to effect a considerable stoppage 
of non-essential security issues. By the War Finance 
Corporation Act of April 5, 1918, its functions passed 
to a new committee of the same name.^^ In still other 
ways the Federal Reserve Banks rendered valuable serv- 

" For a description of the operations of this Committee see, in 
this series, W. F. Willoughby, Government Organization in War 
Time and After. 

137 



WAR COSTS AND THEIR FINANCING 

ice in carrying out the program of war finance, as by 
supervising foreign-exchange transactions. 

The work of the banks as fiscal agents of the Govern- 
ment can best be illustrated by stating results. The 
Government's policy was to meet current expenditure 
by placing short-time Treasury certificates of indebted- 
ness, funding these later into long-term bonds. It made 
the Federal Reserve Banks its fiscal agents in their 
respective districts. Certificates were offered through 
the Federal Reserve Banks and subscribed by all bank- 
ing institutions according to fixed quotas, and the credit 
placed to the account of the Government. When loans 
were to be marketed, each reserve bank organized loan 
committees, with interlacing subcommittees throughout 
its district. Loan quotas were allotted in a predeter- 
mined ratio according to resources, population, etc. 
All banks received applications, accepted payments, dis- 
tributed bonds. Sometimes they underwrote their 
respective quotas and remarketed the bonds with sub- 
scribers, holding temporarily many bonds sold on the 
instalment plan. The Federal Reserve Board also 
facilitated placing loans by adopting the rule of prefer- 
ential discounts for loans made by member banks to bor- 
rowers for the purpose of purchasing bonds, at first at 
3I/2 per cent., then at 4 per cent., and for the Fourth 
Liberty Loan carrying the borrower at the same discount 
as the interest of the bonds. Still later member banks 
became the agents of non-member banks for the redis- 
counting of such loans as the latter made to their cus- 
tomers to purchase war bonds. The banks rendered 
invaluable service not merely to the Government by 
assisting the flotation of th-e bond issues, but also to 
business by loaning freely on war paper. 

During 1917 the reserve banks as fiscal agents 
138 



PAPER MONEY AND BANK CREDIT 

distributed Treasury certificates to the amount of 
$3,338,698,000. During the same year as fiscal agents 
they marketed two Government loans totalling $5,808,- 
000,000. In 1918 they distributed under a definite plan 
of the Treasury Department certificates of indebtedness 
totalling about $9,000,000,000. In July the Treasury 
submitted a plan calling for the absorption of 
$6,000,000,000, of these certificates in bi-weekly lots of 
$750,000,000 between July and November. In anticipa- 
tion of the Third Loan the banks distributed $3,000,000,- 
000, and in anticipation of the Fourth, $4,518,000,000. 
During 1918 as fiscal agents they marketed these two loans 
which resulted in subscriptions of $11,000,000,000. In 
these various ways the Federal Reserve Banks per- 
formed services for the national fisc which were of incal- 
culable value, and carried through transactions which 
the old national banking system could not have accom- 
plished. 

The enormous expansion of transactions as a result of 
war financing has not been without some deleterious 
influences upon both public and private finance. Of these 
the most striking and far-reaching in its effects has been 
the inflation both of note issues and of deposits. Be- 
tween ]\rarch 30, 1917, a w^eek before the entrance of the 
United States into the war, and December 27, 1918, the 
increase in Federal reserve notes was $2,328,000,000, 
and in deposits, $1,017,000,000. On the side of 
resources there was an increase for the same period of 
$1,152,000,000 in gold and $1,400,000,000 in war paper 
and $502,000,000 in commercial discounts and purchase 
of acceptances. " It will be seen that after making due 
allowance for the notes which have been exchanged for 
gold, the net expansion in note issues has been due 
largely to the discount by the banks of paper secured 

139 



WAR COSTS AND THEIR FINANCING 

by war obligations of the Government. "^^ Not merely 
were the banks hampered by this mass of undigested 
war paper in their portfolios, amounting to about eight 
per cent, of the first four Liberty Loans. ^- but the rates 
of discount were fixed with regard to Treasury require- 
ments rather than the commercial needs of the country. 
The real inflation took place through the expansion of 
bank deposits, rather than through an enlargement of 
note issues. In so far as the Government loan policy 
during the war promoted this, it must bear its share of 
responsibility for the inflation which occurred. 

One of the curious incidents of the war was the treat- 
ment of gold. Practically every country except England 
and the United States suspended specie pajmients and 
thereby legally handed over the gold stock to the safe- 
keeping of the great central banking institutions. Cam- 
paigns were also inaugurated in Germany, France, and 
Russia to induce the people to deposit their hoarded gold 
in the banks, so that these central reserves might be 
strengthened. Between two and three billion dollars in 
gold were added to the holdings of the great banks of 
the world during the period of the war, practically aU 
of which was withdrawn from circulation. Indeed, it 
may be said that more gold was mined out of the pockets 
of the people during this period than out of the earth. 
The Federal Reserve Banks of the L^nited States, holding 

^ Fifth Annual Report of the Federal Reserve Board, 1919, 
p. 17. The net increase in currency was much less than the 
issue of Federal reserve notes, since gold and considerable silver 
were withdra-\vn from circulation. This is reflected in the 
increase in the gold reserves. 

^- It may be estimated, upon the basis of holdings by member 
banks of the Federal Eeserve Svstem, that the banks of the coun- 
try held on July 1, 1919. between 86.000.000,000, and 
$6,500,000,000 of war paper as security and collateral. 

140 ^ 



PAPER MONEY AND BANK CREDIT 

about one-third of all the gold, possess the greatest store 
ever brought together in the history of the world. 

Practically every country placed an embargo upon 
gold. In England and the United States, which nomi- 
nally had not suspended specie payments, it was 
made very difficult for the ordinary citizen to obtain 
gold even at the officially designated redemption 
agencies. There was a general tacit agreement that it 
was unpatriotic to ask for the redemption of notes in 
gold. Foreign exchange came to be regulated, not by 
the shipment of gold, but by the granting of credit or 
the placing of loans, and so skillfully was this done that 
in spite of the extraordinary^ dislocation of trade the 
rates between the United States and England, for 
example, were effectively '' pegged " or stabilized. 

In spite of the enormous stocks of gold which had 
flowed into the United States during the war (the 
excess of gold imports over exports from August 1, 1914, 
to December 10, 1918, was $1,071,669,000), the Treasury 
Department would not permit the free export of gold 
even to those countries with which the trade balance of 
the United States was adverse. It endeavored rather 
to correct the unfavorable rate of exchange with such 
countries by encouraging the export of commodities of 
high value and small bulk; thus, phonographs, type- 
writers, and similar articles were shipped to South 
American countries rather than gold, in spite of the 
fact that such commodities diverted domestic labor from 
war industries and could in no event have been shipped 
in sufficient quantities to have influenced materially the 
rate of exchange. It was possible that exported gold 
might come into the possession of the enemy, and it 
was consequently deemed advisable for the Government 
to control its movement. On September 7, 1917, a 

141 



WAR COSTS AND THEIR FINANCING 

Presidential proclamation was issued forbidding the 
export of all bullion, coin, or currency except in accord- 
ance with regulations to be prescribed by the Secretary 
of the Treasury. The administration of these regula- 
tions was placed in the hands of the Federal Reserve 
Board, which established for this purpose a Division 
of Foreign Exchange. 

Under the operation of these regulations the export 
of gold was permitted only when the foreign-exchange 
situation imperatively demanded it,^^ and even when 
such cases arose efforts were made to avoid it. Arrange- 
ments were made with Argentina by which funds were 
to be deposited in the Federal Reserve Bank of New 
York as a basis for furnishing exchange on that country, 
and the United States Government agreed to ship gold 
at the end of the war if the situation then called for it. 
Similar agreements were made with Bolivia, Peru, and 
Uruguay, and different arrangements, but with a like 
result, were made with India, Spain and Switzerland. 
As a result the discount on the dollar in those countries 
was reduced or wiped out, and gold exports fell off. 
The embargo on gold was finally removed on June 9, 
1919. The table opposite shows the imports and exports 
of gold of the United States during the war. 

In addition to the movement of gold there were large 
net exports of silver, chiefly to India. The net exports 
were as follows: $43,226,368 in the fiscal year 1917; 
$68,853,246 in 1918 ; and $222,349,284 in 1919 ; a total 
of $334,478,898. 

Back of this universal policy of retention by each 
country of its stock of gold and unwillingness to permit 

*^The exports of gold fell from 202.5 million dollars for the 
first six months of 1917 to 21.5 millions for the corresponding 
period of 1918. 

142 



PAPER MONEY AND BANK CREDIT 



United States Gold Imports and Exports, 1914-1919 

{In thousands) 



Period 


Imports 


"Exports 


Excess of 
imports 


Aug. 1-Dec. 31, 1914 

Jan. 1-Dec. 31, 1915 

Jan. 1-Dee. 31, 1916 

Jan. 1-Dec. 31, 1917 

Jan. 1-Dec. 31, 1918 

Jan. 1-June 30, 1919 


$23,253 
451,955 
685,745 
553,713 
61,950 
50,465 


$104,972 

31,426 

155,793 

372,171 

40,848 
97,008 


*— $81,719 

429,529 

529,952 

181,542 

21,102 

*— 46,543 


Total 


$1,827,081 


$802,218 


$1,024,863 



* Excess of exports over imports. 

it to be exported lay the fear that if it were let go it 
might get into the hands of the enemy. At the basis 
lay the conviction that large gold reserves v^ere essential 
to the support of the credit organization upon which 
the finances of all the belligerents were dependent. Even 
though specie payments were suspended and existing 
issues of bank notes or paper money were inconvertible, 
the psychological reaction of large gold resources upon 
the public mind undoubtedly inspired the accumulation 
of the metal. Perhaps even more than this the necessity 
of redeeming ultimately the large issues of fiduciary 
money made the Governments unwilling to surrender 
any of their gold, even though in the interval it was 
maintained merely as an idle hoard. Manifestly the 
nation with the largest ratio of gold to paper would be 
in the best position to resume specie payments. 

The logical inference from the experiences in the ship- 
ment of gold and the stabilization of exchange during 
the war was drawn by the Treasury Department as 
early as 1916. In that year a convention was framed 
providing for the establishment of an International Gold 
Clearance Fund, based upon the conclusions of the meet- 

143 



WAR COSTS AND THEIR FIXA^XIXG 

ing of the International High Commission held in 
Buenos Aires in April of that vear.^^ There was pro- 
posed the establishment of an International Gold Clear- 
ance Fund, under a joint or multiple international 
guaranty, to facilitate financial transactions between 
nations without actual shipment of gold, similar to the 
machinery maintained by the Federal Reserve Board to 
settle balances between banks within the United States. 
The Federal Reserve Board has expressed its willing- 
ness to assist in the inauguration of such a system, wliich 
it thought should be confined in the beginning to the 
United States and the Entente Allies and a few of the 
leading neutral nations, but which might eventually 
admit all civilized countries.^^ 

One of the interesting and quite unexpected results 
of the changes wrought by the war has been a fall lq 
the price of gold duriug the past five ^-ears. This was 
not caused by overproduction, for the production of gold 
actually declined during the war. The output in the 
United States fell off from $100,000,000 in 1915 to 
$81,000,000 in 1917, many of the smaller mines being 
closed on account of rising wages and increased cost of 
production. Gold shared the fate of paper currency, to 

" The ConTention Providing for the Establishment of an Inter- 
national Gold Clearance Fund. Published by the Central Execu- 
tive Council of the International High Commission (Washington, 
19191. 

^ The successful operation of the Gold Settlement Fund in the 
United States has suggested the possibilities of avoiding ship- 
ments of gold from one country to another in settlement of bal- 
ances arising out of ordinary commercial transactions, and the 
Board is ready if authorized to do so, to undertake negotiations 
looking to the establishment of an International Gold Exchange 
Fund, or to assist in any way in its power in negotiations which 
may be begun by a Government department looking to that end. 
. . . The saving of loss and expense incident to abrasion and 
transportation charges, and interest on gold transferred, will 
be enormous, and the advantage to the commerce of the world 
will he incalculable. — Report, 1918. p. 35. 

144 



PAPER MONEY AND BANK CREDIT 

which it was tied by a fixed mint price of $20.67 per 
ounce. The fall in the case of gold to half its former 
purchasing power was caused by the general rise in 
prices of commodities and wages of labor which resulted 
from the increase in the amount of the circulating 
media in forms other than gold, as well as from 
scarcity. The situation thus created led to a demand 
on the part of gold producers for Government assistance 
by means of a bounty or some other form of aid. No 
action, however, was taken towards this end. Although 
it is recognized that the gold-producing interests have 
suffered severely from the unprecedented fall in tlie 
value of gold, it must be regarded as fortunate that 
no artificial stimulation has been given to its production. 
Increased gold production would simply have caused a 
still greater rise in prices, either by entering directly 
into circulation or by being made the basis for a further 
expansion of credit. 

The price of silver, on the other hand, has risen in 
common with that of other commodities. This fact has 
already caused a renewal of the demand, of which little 
had been heard for twenty years, for bimetallism. It is 
not unlikely that bimetallism will be urged on the ground 
that the stock of gold constitutes an inadequate basis 
for the existing credit superstructure and that the 
remonetization of silver would strengthen the system 
But the arguments that previously caused the rejection 
of bimetallism and the adoption of the gold standard 
apply now as strongly as ever. The solution of existing 
currency and banking problems must be sought along 
lines other than those proposed by the bimetallists. 



145 



CHAPTEE VI 

LOANS IN EUROPE 

Cleneral characteristics — British war loans — Use of loans in 
France, Russia, and Italy — The German theory of war 
finance — German banks and loan bureaus — Loans in 
Austria-Hungary, Bulgaria, and Turkey. 

In any financial study of the "World War the subject 
of loans assumes a preponderant importance, for over 
four-fifths of the war expenditures were met by bor- 
rowing. Not only did this method of raising funds rank 
first by reason of its magnitude, but also by reason of 
its universality. Everywhere the method of borrowing 
was used as a means of securing the necessary money. 
Although each country financed its war needs according 
to its power and its national customs, which differed 
greatly in some respects among the different countries, 
these often underwent profound changes during the 
war. Certain distinct features and tendencies developed 
which were more or less characteristic of all the belliger- 
ent countries and which may be briefly summarized. 

(1) Magnitude. — Whatever else may be said in 
praise or blame of the financing of the World War, there 
can be no question of its preeminence with respect to the 
magnitude of the war loans. Indeed, it has been said 
that the costs of the late war exceeded those of all other 
European wars together since the beginning of the 
Christian era. Not only was the aggregate enormous, 
but single issues were brought out and successfully 
floated which a few years earlier would have been 

146 



LOANS IN EUROPE 

deemed impossible by the best informed financiers. In 
point of size the first place is held by the Fourth Liberty 
Loan of the United States, which reached a total of 
$6,993,000,000, subscribed in three weeks; England 
ranks second with her third loan, amounting to 
$4,811,000,000, although the fourth, which took the form 
of continuous borrowing over a period of almost 15 
montlis, reached a total of $8,461,000,000. The largest 
French issue was the fourth, amounting to $6,000,000,- 
000 nominally and representing a return to the Treasury 
of $4,250,000,000. In Germany the largest loan, the 
eighth, amounted to $3,520,000,000. In other countries 
the loans were considerably smaller in amount. 

(2) Limitation of Amount. — Although the ministers 
of finance were always anxious to secure as large returns 
as possible from offerings, they sometimes manifested 
praiseworthy self-restraint by imposing in particular 
loans a fixed limit upon the amount that would be 
accepted by the Treasury. In the United States sub- 
scriptions to the First and Fifth Liberty loans were 
limited to the amounts originally asked, while to the 
Second Loan oversubscriptions of 50 per cent, only 
were accepted. Canada limited the amount on all loans 
except the last. France and Italy limited the amounts 
accepted on their first loans. In all other cases the full 
amounts subscribed were taken by the Treasury. 

A striking characteristic was the fairly steady increase 
in the amounts of the loans in all the belligerent coun- 
tries. This was due in part to the growing war spirit 
and the determination to carry the struggle through 
to a victorious finish. But more responsible for the 
increase in the successive loans was the growing cost of 
the war, which led to unheard-of demands upon the 

147 



WAR COSTS AND THEIR FINANCING 

peoples. These increasing costs in turn were caused 
partly by the scarcity of needed supplies, but primarily 
by the inflation of the currency and the steady deprecia- 
tion of the monetary unit, a phenomenon world-wide in 
its influence. Measured in purchasing power, the later 
loans did not represent an increase at all comparable 
with the nominal amounts subscribed. 

- (3) Term. — A general policy of war borrowing 
seemed to have been developed by common consent in 
all the belligerent countries. Advances from the central 
banking institutions and issues of short-term Treasury 
bills were first made use of, and these w^ere later funded 
by issues of long-term bonds. Advances from the banks 
were used to a large extent in France, Russia, Italy, and 
Austria-Hungary, countries in which a discount market 
and the practice of deposit banking were not well 
developed. The issue of short-term Treasury bills in 
anticipation of loans characterized the financial policy 
of the United States, Great Britain, and Germany, and 
France, too, made large use of short term hons. In the 
first-named group of countries the advances from the 
banks have been taken up only to a slight extent by 
the issue of long-term obligations, and they remain still a 
charge against the State. In the second group of coun- 
tries the Treasury bills have been or are in process of 
being funded (except in the case of Germany, where 
an enormous floating debt, estimated at 72,000,000,000 
marks, exists) into long-term loans, either at regular 
intervals, as in Germany, or at irregular intervals deter- 
mined by the state of the market, as in Great Britain 
and France. In all the European belligerent countries 
the war left a considerable floating debt which must be 
funded by further issues of long-term bonds. 

148 



LOANS IN EUROPE 

(4) Maturing or Perpetual Bonds. — The type ol 
bond issued in the different countries was determined 
largely by pre-war habits and predilections of the 
people. As between terminable or perpetual loans the 
former was much the more preferred. In France, Italy, 
Germany, and Hungary the rente type of loan was used, 
in which an optional redemption date was fixed by the 
Government but no date of maturity was named in the 
bonds. The issues of all the other countries, and some 
of those of the countries just named, took the form of 
terminable bonds. A large number of these contained 
the optional feature, according to which the Government 
fixed an optional redemption date within a compara- 
tively short period and a due date at which the bonds 
matured at a considerably later date. Thus, the first 
British loan was made redeemable in 10 years and pay- 
able in 13 ; the first Russian loan was a 10-40 year bond ; 
the first Italian loan was a 10-25 year bond. On the 
other hand, all the war bonds of Canada and Australia 
were straight-term bonds running from five to 20 years. 
No country made use of annuities. 

(5) Period of Subscription. — As the costs of the war 
and the consequent size of the war loans increased, it 
became necessary in most instances to prolong the period 
of subscription. Whereas in the earlier loans a week 
might have sufficed to obtain the sums needed, toward 
the end of the war the subscription periods would some- 
times be left open for two or three months. Unique in 
this respect was the continuous loan opened by Great 
Britain on October 1, 1917, and not finally closed until 
January 18, 1919, thus covering a period of nearly 15 
months. In those countries in which war savings certifi- 
cates were sold an exception might also be made to cover 

149 



WAR COSTS AND THEIR FINANCING 

tliem, for the policy of continuous sale was adopted for 
these also. In certain instances in which the amount of 
the loan was fixed and the subscriptions did not equal 
the amount in the period originally set, the time was 
extended until the requisite sum was forthcoming. 

(6) Bate of Issue, — The fixing of the date of issue 
was of secondary importance. Except in the case of 
Germany dates of issue seem to have been determined 
largely by convenience, if not by chance. Germany's 
loans were issued at six-months intervals, evidently 
according to a prearranged schedule, though the choice 
of a first date was probably determined more or less by 
the fortuitous date of the outbreak of the war. Once 
the dates of Germany's loans were fixed, those of 
Austria-Hungary and of her lesser allies were deter- 
mined in relation thereto, in order that there might be 
no competition among them in the loan market. The 
same thing was true of the Entente Allies. A proposal 
for a joint loan on the part of the Great Powers was 
rejected as impracticable,^ but an understanding was 
reached by which the European Powers, although bor- 
rowing independently, consulted together so that they 
did not come upon the money market simultaneously 
and thus compete against each other for capital. 

(7) Rate of Interest. — The rate of interest varied 
from 31^ per cent, for the first British loan and the 
First Liberty Loan of the United States to six per cent, 
in the case of the Hungarian loans. There was every- 
where a gradual, and in some cases a considerable, 
increase in the rate of interest that had to be offered to 
attract the necessary capital, even in those countries 

1" Finance of the War," Spectator, February 20, 1915, p. 254. 

150 



LOANS IN EUROPE 



which started with the lowest rates. An apparent excep- 
tion exists in the case of Germany and Austria-Hungary, 
where the rate of interest remained unchanged at five 
or six per cent, throughout the war. But this exception 
is more apparent than real, for considerable compulsion 
was used in the flotation of these bonds, especially of the 
later issues, and contractors and banks were forced to 
accept them. Moreover, the appearance of a uniform 
rate of interest w^as w^holly artificial in the case of Ger- 
many, for the later loans had attached to them valuable 
premiums. 

According to a computation published a few years 
before the war, the rate of Government loans for the 
leading powers of Europe ranged from a little under 
three per cent, to somewhat over five per cent. The 
following table indicates the credit of the different 
European nations before the war:^ 

Pre-War Credit op the Leading European Nations 



Country 


Name of Loan 


Average 
price, 
1907 


Value 
reduced to 
3 per cent. 

base 


Real 
rate of 
interest 


Great Britain 

France 

Germany. . . . 

Austria 

Russia 

Italy 


2| per cent, consol. 

3 per cent, rente . . . 
3| per cent, rente. . 

4 per cent. bond. . . 

5 per cent. bond. . . 
3i per cent, bond 

free of income tax 


94.1 
94.8 
94.6 
97.9 
75.2 

102.4 


100.6 
94.4 
81.1 
69.9 
56.4 

81.1 


2.9 
3.1 
3.7 
4.2 
5.3 

3.7 



Tt is evident from this showing that the credit of the 

2 F. W. Hirst, " The Credit of Nations." in Report of National 
Monetary Commission (1910), xx, pp. 6-8. 

151 



WAR COSTS AND THEIR FINANCING 

different European nations was variously rated before 
the war. These differences persisted and were further 
magnified during the course of the war. Moreover, the 
credit of all the nations suffered as a result of their 
excessive borrowing. The rise in the rates of interest 
would undoubtedly have been much greater had the 
appeal been made only to purely commercial motives, 
but as a matter of fact the appeal to the patriotism of 
the peoples of the belligerent countries was sufficiently 
strong to secure the needed funds at rates which, con- 
sidering the investment features alone, were remarkably 
moderate. 

(8) Price of Issue. — From the standpoint of the pur- 
chaser the nominal rate of interest was of less moment 
than the real yield, and this was a function of the two 
factors of interest rate and issue price. In this latter 
particular there was considerable diversity. The United 
States, Australia, and New Zealand sold all their bonds 
at par ; Great Britain issued all of hers except the third 
(in part) at par; Canada and India issued about half 
of theirs at par. The Continental European nations 
without exception followed the plan of issue at a dis- 
count, usually at only a slight concession of from two 
to seven or eight points. The only departure from 
this rule is found in the case of France, which issued the 
first two loans at about 88, the third at 68, and the 
fourth at 60. This was in conformity with French 
financial practice, which prefers a low rate of interest 
on a bond sold at a discount to a bond sold at par 
bearing a high rate of interest. It is scarcely necessary 
to point out that such a method makes for a per- 
petual debt, as it practically denies the possibility of 
redemption. 

152 



LOANS IN EUROPE 

(9) Conversion Privileges. — In order to make the 
bonds more attractive they often carried the provision 
of convertibility into subsequent issues bearing higher 
rates of interest or more advantageous terms of redemp- 
tion. This provision was made v^ith the double purpose 
of strengthening public credit and of preventing dis- 
crimination against purchasers of earlier issues, and also 
for the purpose of amalgamating the pre-war debt and 
the war debt. In France and in England practically the 
whole of the pre-war debt was successfully converted 
in the midst of the issue of war loans. As a result of 
granting conversion privileges to holders of earlier 
issues, however, the advantage derived from floating 
these loans at a low rate of interest was lost. 

(10) Freedom from Taxation. — It may be said that 
outside of the United States, Great Britain, and the 
British colonies the loans were issued free of taxation, 
with respect to either principal or interest or both. The 
English-speaking countries experimented with both 
kinds and fixed unhesitatingly upon the issues subject 
to tax. The United States was the only country that 
granted tax exemption for small blocks for a certain 
length of time. The variety and extent of the exemp- 
tions granted in the different countries make it difficult 
to compare the real rates of interest paid, in addition 
to which the diversity in the rates of taxation in the 
different countries adds another element of variation. 

(11) Collateral Privileges. — Other features designed 
to make the bonds attractive to investors were added in 
most of the borrowing countries. For example, the right 
would frequently be given to tender the bonds in pay- 
ment of customs duties, or excise duties, or estate taxes, 

153 



WAR COSTS AND THEIR FINANCING 

or war-profits taxes, or as security in any judicial pro- 
ceeding in which security was required, or in payments 
on GoA^rnment contracts. In some of the countries the 
banks were either authorized or were under compulsion 
to loan on war bonds as collateral at unusually favorable 
rates of interest. 

(12) Bond-Purchase Funds. — Several of the coun- 
tries, notably the United States, Great Britain, and 
France, established funds which were to be devoted to 
the purchase of bonds in the open market with a view 
to sustaining their price. In Germany the same end 
was achieved by requiring the Reichsbank and other 
banks to repurchase the war bonds at the issue price 
from the original subscriber in case of dire need of the 
owner. So frequent and so large were the issues of 
bonds, however, that it is doubtful whether the creation 
of these funds exercised any potent influence in main- 
taining the price of the bonds on the market. There 
was an enormous quantity of undigested securities the 
presence of which exercised a depressing influence. 

(13) Internal or Foreign Loans. — Because of the fact 
that practically every civilized country in the world, 
belligerent or neutral, was forced into the loan market 
during the war, there was practically no free market 
for the loans of the belligerents. The only important 
exception was the United States, where foreign loans 
to the amount of $3,000,000,000 were placed with 
bankers, corporations, or private individuals in the two 
and one-half years following the outbreak of the war in 
1914. Each nation consequently was forced to rely upon 
its own citizens to supply the Government A\ath capital. 
The long-term bonds were placed almost exclusively 

154 



LOANS IN EUKOPE 

as internal loans in the country issuing tliem. It was 
possible to place in foreign markets on any considerabk 
scale only short term Treasury securities. In some cases 
these were absorbed by private investors, but for the 
most part they were taken by allied Governments as 
evidence of the indebtedness created by the purchase 
of war supplies and foodstuffs in the selling country. 
Thus, the Governments of the United States, Great 
Britain, France, and, to a slight extent, Japan, on the 
one side, and Germany, on the other, made advances to 
their allies; in fact, it may be said that these countries 
financed almost wholly the war operations of the other 
nations with the exception of Eussia and Italy. The 
last two, though receiving substantial financial assistance 
from their stronger allies, still raised the major part 
of their own funds. 

(14) Methods of Suhscription and Payment. — In the 
endeavor to secure large and general subscriptions every 
effort was made to facilitate subscription to the bonds 
and to render payment easy. Subscriptions were 
received not only at the Treasury of the issuing country, 
but by any bank or post office, and in some cases special 
selling agencies were established. Payment was very 
generally permitted on the instalment plan, and this was 
made still easier for persons of small means by the 
acceptance at the banks, often as a result of legislation, 
of war bonds as security for loans at rates of interest 
equal to or only slightly higher than the rates borne 
by the war bonds themselves. Germany went furthest 
in this direction and established the war loan offices 
already described, which were authorized to loan money 
on practically any merchantable commodities for the 
purpose of financing the war loans. 

155 



WAR COSTS AND THEIR FINANCINa 

(15) Low Denomination of Bonds. — It may be said 
without fear of contradiction that never before in the 
history of Government borrowing have Government 
loans been so widely distributed. This was due in a large 
measure to the general appeal to patriotism in all the 
belligerent countries and to the loyal response on the 
part of the people, but partly responsible also was the 
fact that the bonds w^ere put out in low denominations 
which brought them within the reach of even the 
humblest buyer. The lowest denomination in any of the 
countries was 25 cents, which was the price of the thrift 
stamps in the United States and Canada and the war 
savings stamps in Great Britain. These, however, did 
not bear interest but could be exchanged for interest- 
bearing war savings certificates, the lowest denomination 
of which was $5 in each of the countries named. In 
bonds the lowest denominations were those issued in 
Hungary ($10) ; France, Italy, and Austria ($20) ; 
Russia and Germany ($25) ; and the United States and 
Canada ($50). In Great Britain the smallest denomina- 
tion of war bond was $250, but inscribed stock or instal- 
ment allotments were issued for small sums which might 
be retained until the bonds were fully paid for or 
exchanged for scrip certificates 'to bearer. As a result 
of these methods the loans were widely distributed and 
were in the truest sense popular. 

(16) Distribution. — The number of subscribers in 
every country in which figures on the subject were pub- 
lished was not only large, but showed a very general 
increase from one issue to the next. In the countries 
for which these statistics were published (and we may 
assume that the lack of information from the other 
countries indicates that the contrary was probably the 

156 



LOANS IN EUROPE 

case there) a progressive increase in the number of 
subscribers was observable. In placing the earlier loans 
foreign Governments resorted, as was their wont, to 
bank consortiums or large corporations. It soon became 
evident, however, that the war was not to end as 
speedily as had at first been anticipated, and conse- 
quently plans were devised in all the countries to attract 
the small investors. Publicity campaigns, well organized 
drives, social pressure which amounted practically to 
compulsion were all made use of to secure a general 
distribution of the bonds. Taking the largest number 
of subscribers for any one loan in each country, the 
results were approximately as follows : United States, 
21,000,000 ; Great Britain, 5,000,000 f France, 7,000,000 ; 
Italy, 490,000; Canada, 1,000,000; Austrialia, 220,000; 
Germany, 7,000,000. No statistics on this point were 
published in Russia, New Zealand, India, or Hungary. 
Austria announced the number of subscribers only in 
the case of the sixth war loan, when the figure was given 
as 290,000. 

It is, of course, unlikely that the distribution of the 
bonds is final, and there is no way of determining the 
extent to which the original subscribers have sold their 
holdings. This would vary in different countries accord- 
ing to national characteristics and habits. It may be 
concluded, however, that a remarkably wide distribution 
of the war loans has been effected, and it may be 
expected that this fact will be an influential factor in 
preventing the repudiation of the war debt in any of 

* " In 1914 the British debt was concentrated in the hands of 
345,100 holders; at the present time it is divided amoncr more 
than 16,750,000 large and small holders, of whom 2.228.300 sub- 
scribed through the Bank of England to the war loans, 4,000,000 
subscribed through the post office, and more than 10.500.000 
possessed war savings certificates." Federal Reserve Bulletin, 
November, 1918, p. 1065. 

157 



WAR COSTS AND THEIR FINANCING 

the countries, the present action of Russia to the con- 
trary notwithstanding. Large amounts of the war loans 
were taken of necessity by the banks, especially the large 
central institutions. The portfolios of the banks and 
credit institutions in all the belligerent countries are 
to-day filled to overflowing with w^ar paper, but the 
distribution of these holdings cannot be regarded as 
final, and one of the problems of the future will be the 
absorption of this paper by the investing public. 

(17) Success of the Loans. — In view of the enormous 
sums secured by the Governments and the wide distribu- 
tion of the bonds there can be no question as to the 
success of the loans. This was made possible by the 
complete mobilization of all the financial resources of 
the belligerents for the single purpose of financing the 
war. The business of the banks was reorganized, the 
amount and character of the currency determined, the 
exchange market regulated, and the exportation of gold, 
securities, and other forms of capital prohibited — all 
to this single end. The loan market was reserved at 
intervals exclusively for Government issues, and at all 
times the use of credit for non-governmental purposes 
was discouraged. The production of non-essentials was 
curtailed, the placing of foreign loans was forbidden or 
greatly restricted, issues of corporate securities were 
strictly controlled and were permitted only in case the 
industry could be shown to be one which would assist 
in the prosecution of the war. In short, all available 
capital was requisitioned as far as possible for the 
needs of the State, and private industry was 
rationed with regard to capital as thoroughly as indi- 
viduals were with regard to food. This devotion of all 
available financial means to war purposes was made 

158 



LOANS IN EUROPE 

possible by the active and patriotic cooperation of 
lenders and of the credit institutions. 

So much for general considerations. There are re- 
vealed here many and important likenesses in the loans 
of all countries, but it is likewise evident that the 
financing of each nation was determined in a large 
measure by national habits and characteristics. A brief 
survey of the war loans of the principal belligerents is 
therefore of interest and essential to the present study. 

The British Treasury tried many financial devices 
for securing funds. At the beginning of the war it 
issued Treasury bills and also secured advances from the 
Bank of England, which together provided the neces- 
sary funds until the first war loan was issued in 
November, 1914. It also made use of long-dated 
Exchequer bonds which were used to fund Treasury 
bills when the amount of the latter outstanding became 
too large. Later periodic loans were supplanted by a 
policy of continuous borrowing without fixed subscrip- 
tion periods or limitation to any one type of security. 
Unlike Germany, the British Government did not follow 
any prearranged plan but experimented with various 
devices in conformity with changing conditions and 
needs. In addition to the more formal loans it resorted 
also to the sale of war savings and war expenditure 
certificates. 

To secure the funds necessary to finance the first 
operations of the war the Chancellor of the Exchequer 
resorted at once to the issue of Treasury bills. Because 
of the interruption of normal trade the banks had con- 
siderable sums of idle money which they were glad to 
invest by discounting these bills at rates as low as 3^ 

159 



WAR COSTS AND THEIR FINANCING 

per cent. Since it could secure money on such easy 
terms, there was a tendency on the part of the Treasury 
to rely upon this form of short-term obligation, but as 
the Treasury bills grew in volume, they became 
unwieldy and it was necessary to fund them into 
long-term bonds. During the period from August 1 to 
December 31, 1914, there were six emissions of Treasury 
bills of $75,000,000 each. These were met in part by 
the issue of the first war loan in November. The net 
issue of Treasury bills for the fiscal year ending ]\Iarch 
31, 1915, amounted to $320,750,000. 

The first war loan amounted to $1,750,000,000, in 
31/2 per cent. 1925-1928 bonds at 95. In addition to this 
popular loan the Treasury also sold three per cent, five- 
year Exchequer bonds to the amount of $238,500,000. 
Advances from the Bank of England during this period 
amounted to $800,000,000. The loans from the begin- 
ning of the war to the end of the fiscal year on March 
31, 1915, resulted almost in doubling the pre-war debt. 
They are shown in the following table : 

Borrowing in Great Britain, Fiscal Year 1915 

Pre-war debt $3,538,270,550 

Treasury bills, net $320,750,000 

3 per cent. 1920 Exchequer bonds 238,500,000 

31/3 per cent. 1914 war loan 1,480,000,000 

Advances from Bank of England 802,138,115 

Total $2,841,438,115 

At the beginning of the fiscal year 1915-16 it was 
realized that the war was not to end as speedily 
as had been optimistically anticipated at first. The 
expenditures for the coming year were estimated at 
$5,633,270,000, and revenue receipts were expected to 
yield $1,351,660,000, leaving a balance of $4,311,610,000 

160 



LOANS IN EUROPE 

to be met by loans. The immediate needs of the 
Treasury were met by the sale of short-term securities. 
Treasury bills were issued in large amounts at compara- 
tively low rates of interest, and by June 21, 1915, the 
amount of these bills outstanding was $1,175,000,000. 
It was felt to be unwise further to swell the floating 
debt, and accordingly a second war loan was issued. 
Chancellor McKenna in commenting upon this loan gave 
three reasons for its issue, namely, that it did not mature 
for a long period (30 years), that its issue would help 
the foreign-exchange situation, and that the resort, to 
long-term loans was economical both in rate of interest 
and in cost of administration. This second loan differed 
from the first in several respects. The rate of interest 
was higher, and the loan was unlimited in amount, the 
latter provision being made in order to enable the con- 
version of older Government securities into this new 
'loan. As a matter of fact, most of the 1914 3I/2S and a 
considerable part of the consols were converted into this 
new war stock. In order to attract small investors the 
Post Office was authorized to sell small denomination 
bonds of $25 and $125 and also scrip vouchers of $5, 
$2.50, and $1.25 which could be applied on the purchase 
of the bonds. 

The first loan had been taken principally by the large 
financial institutions and wealthy subscribers, the total 
number of subscribers being only 100,000, but the 
second loan was taken by 1,100,000 subscribers, and at 
the same time the amount was almost doubled. The 
proceeds of this loan sufficed to meet the expenditures 
for but three or four months, so rapidly were they 
increasing. The Chancellor was consequently forced to 
make use of every credit device available. In addition 
to the war loan of June recourse was had also to short- 

161 



WAR COSTS AND THEIR FINANCING 

term Exchequer bonds, to loans in the United States, 
to war expenditure and war savings certificates, and at 
all times to Treasury bills. By the end of the fiscal 
year 1915-16 a total of some $6,779,297,280 had been 
secured from all these sources, from which must be 
deducted $802,138,115 repaid to the Bank of England. 
The borrowings of the year are shown in the following 
table : 

BoBBOwiNG IN Geeat Beitain, Fiscal Yeab 1916 

Treasury bills, net $2,464,090,000 

31/2 per cent. 1914 war loan 178,992,040 

3 per cent. Exchequer bonds, 1920 1,211,725 

4-/2 per cent, war loan, 1915 2,961,725,900 

5 per cent. Exchequer bonds, 1920 768,445.000 

United States Anglo-French loan 254,100,115 

Other advances (Bank of England) 99,482,500 

$6,779,297,280 
Less repayment to Bank of England 802,138,115 

Net debt created by borrowing, 1915-16 $5,977,159,165 

Large as were these sums, the needs of the next fiscal 
year were larger. By the end of the fiscal year 1917 
the daily cost was over $35,000,000. Although drastic 
increases were made in taxation, it was necessary to rely 
mainly upon loans to secure the $11,000,000,000 which 
the war cost Great Britain that year. Short term Ex- 
chequer bonds to a total amount of over $1,750,000,000 
were sold, bearing five and six per cent, interest. 
Three loans were floated in the United States and one 
in Japan. War savings and war expenditure certificates 
were utilized to secure the savings of small investors, 
and in February, 1917, a third war loan was float-ed. 

This third loan was issued in two forms, (1) five per 
cent, bonds redeemable 1929-1947, issued at 95, and sub- 

162 



LOANS IN EUROPE 

ject to taxation and (2) four per cent, income tax-com- 
pounded bonds redeemable 1929-1942, issued at par. 
Subscriptions amounted to $5,001,564,750, but only 
$3,901,885,000 was covered into the Treasury before the 
end of the fiscal year. The public showed an unmistak- 
able preference for the taxable bond at -the higher rate 
of interest, as only $110,000,000 was subscribed in the 
tax-free form. A new type of sinking fund was pro- 
vided for in this loan, which was to be used in purchas- 
ing stock whenever it fell below the issue price; each 
month one-eighth of one per cent, was to be set aside 
until the sum of $50,000,000 had accumulated. Most 
of the 4V2 per cent, stock of the previous loan was 
converted into the new issue, but there were no con- 
version rights for the consols and the 1914 3i/^s, both of 
which, as a result, declined markedly. The total num- 
ber of subscribers to this loan was 5,289,000, showing 
a growing determination on the part of the British 
people to see the war through, and also evidencing the 

Borrowing in Great Britain, Fiscal Year 1917 

Treasury bills $8,949,774,000 

41/0 per cent, war loan, 1925-45 2,120 

5 per cent. Exchequer bonds (U. S. loans) 904,493,000 

6 per cent. Exchequer bonds 804,758,500 

War expenditure certificates 149,392,500 

War savings certificates 363.750,000 

Other debt 1 659,479,405 

4 and 5 per cent, war loans 3,901,883,550 

Other advances 988,150,000 



$17,721,684,075 
Less redemptions of: 

Treasury bills $9,441,130,000 

War loans and Exchequer bonds 6,428,525 

War expenditure certificates.... 31,587,500 

Other debt 93.029.925 

9,572,175,950 



Net debt created by borrowing, 1916-17 $8,149,508,125 

163 



"WAR COSTS AND THEIR FINANCING 

efficiency of the publicity work which by now had been 
developed to a high degree. 

With the proceeds of this loan it was possible to 
reduce outstanding Treasury bills, of which nearly 
$9,000,000,000 had been issued during the fiscal year. 
The net borrowing's of the year ending March 31, 1917, 
are shown in the table on page 163. 

The cost of the war increased somewhat during the 
next year, but the high-water mark had practically been 
reached. The daily expenditure amounted to about 
$37,000,000, but although the increase in cost was slight, 
the additions to the revenues were equally small, so 
that greater resort had to be made to borrowing than 
had been anticipated. The fiscal year 1918 was marked 
by two notable changes in the loans of the British 
Government. In the first place the advances from the 
United States Government furnished a needed and 
welcome relief to the strain imposed upon the British 
Treasury. During the fiscal year 1917-18 these advances 
amounted to $2,390,000,000. Second, in the raising of 
internal loans a new policy was inaugurated in October, 
1917, when the plan of fixed subscription periods for 
the sale of bonds was superseded by the day-to-day 
borrowing plan. It was stated by the Chancellor of the 
Exchequer that a minimum amount of $100,000,000 a 
T\Tek would be needed to make this method a success in 
meeting war expenditures. In his budget speech of 
March 13, 1918, he announced that since October 1, 
1917, the total sales had amounted to $2,850,000,000, 
which was slightly more than the prescribed minimum. 

The bonds offered for sale under this plan consisted 
of four issues of different maturities, all of which were 
sold at par. There was a four per cent, ten-year bond 
which was exempt from income tax, and three five per 

164 



LOANS IN EUROPE 

cent, issues due, respectively, in 1922, 1924, and 1927, 
payable at 102, 103, and 105, respectively. The denomi- 
nations were made as low as $250, and no limit was 
placed upon the amount which the Treasury would 
accept. The bonds under these issues were accepted 
for death duties, excess-profits taxes, or munitions 
Exchequer payments on the part of residents of Great 
Britain. In addition to these, short-term obligations 
were also used, so that the plan of continuous borrowing 
combined Treasury bills, short-term Exchequer bonds, 
and long-term war bonds. By the first immediate neces- 
sities were met, which could be funded into the second 
and disposed of temporarily, and the third funded the 
debt for a longer period. So successful was this plan 
that the experiment finally developed into a distinct 
loan policy. Its success was due in large measure to 
the efficient publicity methods used and also to the fact 
that restrictions on the issue of new securities for indus- 
trial or local purposes practically reserved the market 
for Government loans. The day-to-day borrowing plan 



Borrowing in Great Britain, Fiscal Year 1918 

Treasury bills, net $2,544,425,000 

5 per cent. Exchequer bonds, 1922 411,352,000 

6 per cent. Exchequer bonds, 1920 220,000 

3 per cent. Excheque.- bonds, 1930 60,106,000 

War savings certificates 311,100,000 

Other debt (U. S. Government loans, etc.) 3,707,520,490 

4 and 5 per cent, war loans 840,413.100 

National war bonds 3,071,075,000 

$10,946,111,590 
Less redemptions of: 

War loans, Exchequer bonds, etc.. $114,578,185 

War expenditure certificates 3,143,500 

Other debt retired 505,345,165 

Advances repaid 126.275,735 

749,342.585 



Xpt debt created by borrowing $10,196,769,005 

165 



WAR COSTS AND THEIR FINANCING 

was finally closed on January 18, 1919, having resulted 
in a yield of $8,002,955,275 during its life.* 

The net borrowings for the fiscal year 1917-18 are 
shown in the table on page 165. 

Expenditure during the fiscal year 1918-19 remained 
very steady, and as a result of this and other factors the 
total borrowings declined somewhat. This was due to 
two principal causes: first, the Armistice in November 
ended actual warfare, and second, revenues increased. 
The day-to-day borrowing continued ; advances from the 
United States Government were steady; war savings 
certificates brought in $447,500,000, and advances 
from the Bank of England from time to time made 
up the deficit in Treasury needs, reaching a total of 
$1,313,000,000. 

In January, 1919, after the discontinuance of the 
day-to-day national war bonds, the fourth war loan 
was announced. It consisted of two issues of five per 
cent, bonds subject to the income tax, with 5- and 
10-year maturities, respectively^, and four per cent, tax- 
compounded bonds with a 10-year maturity. The issue 
price of the 5s was at par, and that of the 4s at 101.5 
as before, and the prices at which the bonds were 
redeemable remained as before, namely,* 102 for the 
five-year 5s, 105 for the 10-year 5s, and par for the 
four per cents. The new issues differed from the old, 
however, in that the seven-year maturity bonds were 
dropped, and the new bonds w^ere given no rights of 
conversion into past or future war loans. The first 
official announcement of the total subscriptions to the 
loan was made by the Chancellor of the Exchequer, 
Austen Chamberlain, on July 17, 1919.^ He stated that 

* Economist, January 25, 1919, p. 98. 

^Commercial and Financial Chronicle, July 19, 1919, p. 208. 

166 



LOANS IN EUROPE 

the grand total was $3,540,000,000 of which $2,695,000,- 
000 was new money. These figures fell considerably 
below the estimates, and the yield was less than had been 
hoped for. 

Great Britain's borrowings during the fiscal year 
1918-19 are shown in the following table : 

BORROWITs^G IN GrELA-T BRITAIN, FiSCAL YeAR 1919 

6 per cent. Exchequer bonds $20,175 

6 per cent. Exchequer bonds, 1920 4,185 

3 per cent. Exchequer bonds, 1930 4,018,000 

War savings certilicates 447,500,000 

United States advances and other debt 2,776,123,000 

National war bonds 5,332,068,900 

Advances from Bank of England 1,313,603,235 

$9,873,337,515 
Less redemptions of: 

Treasury bills $82,320,000 

War expenditure certificates 114,661,500 

War loans and Exchequer bonds . . 329,795,360 

Foreign debt retired 772,123,795 

1,298,900,655 

Net debt created by borrowing $8,574,436,860 

The total war borrowings of the British Government, 
less redemptions, from August 1, 1914, to March 31, 
1919, were as follows : 

Total Borrowing in Great Britain, 1914-1919 

Treasury bills, net $4,705,590,000 

Anglo-French loan in United States 254,100,115 

United States Government and other foreign 

loans 6,873,874,030 

Bank of England advances through Wavs and 

Means "; 2,274,960,000 

War savings certificates 1,122,250,000 

3, 5 and 6 per cent. Exchequer 

bonds $3,193,308,585 

War loans 11,483,014,590 

$13,676,323,175 

Less redemptions 450,802,070 

13.225,521,105 

Total debt created by borrowing $28,456,295 250 

167 



WAR COSTS AND THEIR FINANCING 

The history of loans in France begins with the pre- 
war loan which was issued on July 7, 1914. This was for 
$180,000,000, in 3^2 per cent. 25-year bonds issued at 
91, and was for the purpose of meeting the deficit 
occasioned by the expenditures in Morocco and the 
extension of the army and navy. Although the loan 
was 37 times oversubscribed, it immediately became a 
stumbling block which hampered war-time finance in 
the succeeding months. Two of the four instalments 
fell due after the war was declared, and it was finally 
disposed of by being converted into the first war loan. 

Following the practice of most of the other Conti- 
nental countries, the Government on the outbreak of 
war turned at once to the Bank of France for financial 
assistance. This institution stands in very close rela- 
tion to the Government. In return for the renewal of 
its charter in 1897 for 23 years, it was under obligation 
to lend to the Government certain agreed sums at the 
nominal rate of one per cent. In 1911 these compulsory 
advances had been fixed at $580,000,000, but in Septem- 
ber, 1914, they were increased to $1,200,000,000, and in 
May, 1915, to $1,800,000,000. During the first five 
months of the war, from August 1 to December 31, 1914, 
the actual advances of the Bank of France to the Gov- 
ernment amounted to $785,000,000, constituting about 
two-thirds of all the money borrowed. 

In addition to the returns from the 3% per cent, loan 
and the advances from the Bank of France, an appeal 
was made direct to the small investor by the offer of 
short-term Treasury bills known as hons de la defense 
nationale, bearing four per cent, for the three-months' 
issue and five per cent, when issued for six months or a 
year. They were sold at 9 6. GO in denominations as low 
as 100 francs and were also used to pay contractors for 

168 



LOANS IN EUROPE 

military supplies. By the end of December, 1914, about 
$:5:^)9,600,000 of these hons had been issued. 

The credit operations of the last five months of 1914 
may be summarized as follows : 

Borrowing in France, 1914 

Correspondents of the Treasury $80,700,000 

Ordinary Treasury bills 23,820,000 

Bons dc la defense nationale 339,460,000 

Sy, per cent, pre-war loan 43.940.000 

Advances from Banks of France and Algeria 785,000.000 



$1,272,920,000 



The year 1915 saw little change in the use of credit 
or credit devices by the French Government. The tax 
situation was slightly bettered during this year, revenues 
being only 19 per cent, below normal, whereas in the 
last five months of 1914 they had been 38 per cent, 
below normal. On the other hand, expenditures were 
mounting rapidly and the needs of the Treasury were 
steadily growing. Further advances were accordingly 
secured from the Bank of France, which by the end of 
the year stood at $1,080,000,000. Bons de la defense 
nationale to the amount of about $1,400,000,000 were 
also issued during the year. These found a ready sale, 
not merelj^ in France, but also in England and the 
United States. In February, 1915, a second type of 
short-term obligation was offered to the public, known 
as obligations de la defense nationale. These were five 
per cent. 10-year bonds issued at 96.5 without limitation 
of amount. Bons and the pre-war 3%s could both be 
funded into the new issues, the latter at 91. 

The obligations had two features which were signifi- 
cant of the difficulties that faced the Treasury, both 
designed to make the security more attractive to 

169 



WAR COSTS AND THEIR FINANCING 

investors: tliey were tax-exempt, and tlie interest was 
paid in advance. Tlie former was a decided break in 
French practice, because all bonds liitlierto issued had 
been taxable. The second feature, pajTnent of interest 
in advance, was not only without precedent in France, 
but was probably without parallel in the financial history 
of modern European states. By the end of the year 
the issues amounted to about $760,000,000, a large part 
of which, however, consisted of conversions of existing 
obligations. 

In October, 1915, the Anglo-French Loan was placed 
in the United States, netting the Government in all 
about $250,000,000, of which $80,020,000 was paid in 
during the year 1915. All these sums proved insufficient, 
however, and in November the first national loan was 
issued. This, known as the " National Defense Loan," 
consisted of a five per cent, perpetual rente issued at 88. 
Exemption from taxation was granted as to both princi- 
pal and interest. This loan proved to be very popular, 
the number of subscribers being 4,156,000. The total 
amount subscribed was $2,618,500,000, of which about 
half represented fresh money and the other half conver- 
sions of Treasury bills and bonds. About $2,200,000,000 
was paid in before the end of the fiscal year. 

The transactions for the year 1915 may be summarized 
in the following table : 

BOEEOWTN-G IN FeAXCE, 1915 

Treasury bills (Ions) $1,294,600,000 

National defense obligations 126.400.000 

Anglo-French Loan in United States 80.020.000 

National War Loan. Xovember, 1915 2.193.400.000 

Advances bv Bank of France 230.000 000 

Miscellaneous. . 46 800 000 

Total $3,971,220,000 

170 



LOANS IN EUROPE 

During the year 1916 the same policy was continued. 
Tlie advances of the Bank of France continued to grow 
steadily during the year, from $1,060,000,000 on Janu- 
ary 6 to $1,760,000,000 on October 19. The Government 
was then able to reduce this floating indebtedness to the 
Bank with the proceeds of the second war loan, bringing 
the amount down to $1,330,000,000 on November 2, 
1916, but by the end of the year (December 31) it had 
increased again to $1,460,000,000. 

The chief dependence of the Government, however, 
was the hons, of which over $3,000,000,000 were issued 
during the year. In February, 1916, a $30,000,000 
credit for war munitions purchases was raised in the 
United States, and in July a $100,000,000 collateral loan 
was negotiated through the American Foreign Securities 
Company, consisting of Rve per cent, three-year gold 
notes issued at 98. Another collateral loan of $50,000,000 
was placed in the United States in September. Foreign 
credits were also created by the French Government 
during this year by the shipment of gold to England, 
and about $80,000,000 was borrowed in Japan, Argentina, 
Switzerland, Holland, Spain, and other neutral countries. 
In October, 1916, a second war loan was issued. This 
was a perpetual rente at five per cent, similar to the 
first loan, issued at 88.75. The subscriptions amounted 
to $2,272,000,000. The loan transactions of this year 
are summarized on page 172. 

The year 1917, like the two previous years, saw 
France still financing the war on credit, primarily by 
the use of short term securities. As the burden of the 
war became greater, expenditures grew much more 
rapidly than additions to tax receipts, and accordingly 
larger amounts had to be raised by means of loans. 
Over three-quarters of the credits granted for the year 

171 



"WAR COSTS AND THEIR FINANCING 



BOKROWING IN FeANCE, 1916 

Balance of Anglo-French Loan $170,000,000 

United States collateral loans 150,000,000 

Treasury bills sold in England 463,000,000 

Bons, unconverted 2,633,200,000 

Second loan, 1916, new money 1,136,000,000 

Advances from Bank of France 400,000,000 

Advances from Bank of Algeria 9,000,000 

Obligations 207,400,000 

Credits in England by gold shipments 300,000.000 

Other foreign credits 80,000,000 

Ordinary Treasury bills 28,400,000 

Total. $5,577,000,000 



1917 was raised by unfunded debt. The Bank of France 
contributed about $1,020,000,000; Sons de la defense 
nationale, the issue of which had been suspended at the 
time of the second war loan, were resumed in February, 
1917, and by the end of the year the total emissions for 
the year totalled $8,020,000,000. The Treasury also 
resumed the issue of obligations in March, and of these 
there were some $60,000,000 outstanding just before the 
November loan. In addition to these two issues a new 
kind of security wa^ put out, beginning March 1, 1917, 
which may be called oMigations-hons, for it united the 
characteristics of both these securities. They were issued 
at par, bore five per cent., and were repayable at the 
end of any six-months' period. If the purchaser held 
them until the end of the five-year period, however, he 
received a bonus of half a year's interest. By the end 
of the 3^ear there were outstanding of these securities 
some $4,000,000,000. 

In April of this year another $100,000,000 collateral 
loan was placed in the United States in the form of 
Sl'o per cent, convertible two-year gold notes offered to 
the public at 99, yielding slightly over six per cent., and 
a $15,000,000 industrial credit was also arranged, 

172 



LOANS IN EUROPE 

covered by French Treasury bills. Treasury bills were 
sold in England to the amount of $600,000,000. 

After the entry of the United States into the war on 
April 6, 1917, the United States Government became 
banker for the Allies. The United States Treasury 
advanced to France during the remainder of the year 
1917 the sum of $1,285,000,000. 

Large as were these sums, they were yet insufficient 
to meet the growing needs of the French Treasury, 
and it became necessary to issue a third war loan in 
November, 1917. This was a four per cent, perpetual 
rente issued at 68.60. This loan was limited to 
$2,000,000,000 real capital or $2,600,000,000 nominal 
capital. The new loan was exempt from the 
income tax. Various mea'sures were taken at the 
time of its issue to maintain its price: it was made 
acceptable at its issue price for the payment of the 
excess-profits tax, and a fund was constituted for the 
purchase of these bonds in the open market if they 
should fall below the price of issue. The results of this 
loan were very satisfactory, the subscriptions amounting 
to $2,914,000,000, of which about half represented fresh 
money and the other half conversions of hons, obliga- 
tions, and other securities. 

The total borrowings for the year 1917 were : 

Borrowing in France, 1917 

Advances from Bank of France $1,020,000,000 

Advances from Bank of Algeria 8,000.000 

Bons, net 1,667,000.000 

Collateral loan in United States, April, 1917 100.000.000 

Industrial credit in United States 15,000,000 

Ohligations-hons, net 2,715.000 000 

Advances from United States G-overnment 1,285.000.000 

Treasury bills sold in England 600,000.000 

1917 war loan, less conversions 1.423. 000, 000 

Total $8,833,000 000 

173 



WAR COSTS AND THEIR FINANCING 

The war expenditure, already crushing, was raised 
during the year 1918 to even greater heights. The total 
credits granted for the year aggregated $10,671,000,000, 
to meet which the Government relied for the most part 
on loans. The advances from the Bank of France still con- 
tinued, the net for the year being $930,000,000, and 
the total on December 26 being $3,430,000,000. Bons 
de la defense nationale continued to be extremely popu- 
lar and represented a steady and dependable reliance of 
the Government at all times. The sale of these hons con- 
tinued steadily from month to month, by December 
reaching a maximum of $100,000,000 a week, with a 
total for the year of $2,614,000,000 ; in fact, so popular 
were they that the Government found it possible by the 
end of the year 1918 to reduce the rate of interest on 
the one- and three-month hons from five to four per cent. 

Toward the end of the year the amount of short-term 
obligations and of the floating debt became so great that 
it was necessary to fund them into long-term bonds. 
Accordingly the fourth war loan was announced in 
October, 1918. This was a four per cent, perpetual 
rente, free from taxation and inconvertible for at least 
25 years. It was issued at 60.80, and no limit was 
placed upon the amount of the loan. Provision was 
made for acceptance in part payment of hons, ohliga- 
tions, 3 1/2 per cent, redeemable renie scrip, Treasury 
bills, and coupons of Russian Government bonds matur- 
ing during the year 1918. In spite of the supposed 
financial exhaustion of France, the subscriptions to this 
loan reached the total of $6,000,000,000 nominal capital, 
representing a net yield to the Treasury of $4,300,000,- 
000. In addition to the sums raised at home, France 
obtained during the year 1918 advances from the United 
States Government to the amount of $1,151,000,000. 

174 



LOANS IN EUROPE 



The total borrowings for the year 1918 were : 

Borrowing in France, 1918 

Advances from Bank of France $930,000,000 

1918 war loan, less conversions 4,300,000,000 

Advances from United States Government 1,151,000,000 

Bons and obligations, net 4,483,750,000 

Total $10,864,750,000 

During the progress of the war about one-quarter of 
the borrowings of the French people were obtained from 
foreign countries. Three-quarters of the enormous sums 
expended on the war by France were raised from the 
French people themselves. Whatever criticism may be 
urged against the exclusive loan policy followed by 
France in financing the war, it must be tempered by 
admiration of the industry and thrift of the French 
people which made it possible for them to contribute 
such sums to the defense of their country. 

Tlie total government borrowings of France from 
August 1, 1914, to the end of the year 1918 may be 
summarized as follows: 

Total Borrowing in France, 1914 to 1918 
Nominal Actual 

War Loans: 1915 $3,041,000,000 $2,661,600,000 

1916 2,302,800,000 2,016,400,000 

1917 2,960,600,000 2,034,200,000 

1918 6.000,000,000 4,300,000,000 

$14,304,400,000 $11,012,200,000 $11,012,200,000 
Advances from United States Government to Dec. 

31, 1918 2,436,427.000 

Advances from Great Britain 2,170,000,000 

Private loans in United States, collateral and 

industrial 686,000.000 

Loans in neutral countries 150,000,000 

Advances from Bank of France 3,430.000,000 

Advances from Bank of Algeria 17,000,000 

Floating debt {hons, ohligations, etc.) 4,483.750.000 

$24,250,377,000 

175 



WAR COSTS AND THEIR FINANCING 

The financial policy followed by Russia in the war 
was similar to that adopted by the other European 
belligerents. It was stated distinctly by the Minister 
of Finance in his budget speech of March, 1916; the 
civil expenditures, he said, were to be defrayed as far 
as possible out of taxation, but the cost of the war and 
deficits in the civil budget were to be met by loans and 
issues of paper money. Taxes were never sufficient to 
meet the civil budget, so that not only were the entire 
expenditures of the war met by loans, but also to some 
extent the civil expenditures. The Treasury conse- 
quently resorted to many forms of loans, and when 
all else failed, as indicated in an earlier chapter, it 
issued paper money. 

During the first few weeks of the war the Government 
depended for financial assistance upon the Imperial 
Bank of Russia, from which it received advances 
through the discounting of Treasury bills averaging 
about $50,000,000 a week. Short-term Treasury 
bonds were issued abroad, and Russian Treasury 
bills were discounted by the Bank of England. 
By December 31, 1914, about $260,000,000 had been 
borrowed abroad. In addition to the foreign loans 
the Government also appealed to the people at home. 
It first issued short-dated four per cent. Treasury 
bills in August to the amount of $150,000,000, and in 
July, October, and December it issued short-term Treas- 
ury bonds amounting to $650,000,000. In November 
the first war loan was announced, consisting of five per 
cent. 10-50-year bonds, issued at 95; the total subscrip- 
tions yielded the Government the sum of $257,000,000. 
The transactions by loans of the Imperial Russian 
Government to the end of 1914 were, therefore, as 
follows : 

176 



I 



LOANS IN EUROPE 

Borrowing in Russia, 1914* 
internal 



INTERNAL 

Long-dated 5 per cent. 49-year loan, Oct. 3 $257,000,000 

Short-dated 4 per cent. Treasury notes, Aug. 22.. 150,000,000 

Treasury bonds. July 23, Oct. 6, Dec. 2G 050,000,000 



EXTERNAL 



Short-dated Treasury bonds, 5 per cent., sold in 

London, Oct. 6, Dec. 26 260,000,000 

Total $1 ,310,000,000 

The year 1915 saw no change in the financial policy 
already established. The GoYernment depended upon 
loans for meeting war expenditures, and in placing these 
loans relied almost exclusively upon short-term obliga- 
tions discounted by the Imperial Bank or subscribed by 
private banks. It was not thought wise or feasible to 
obtain from the poverty-stricken Russian people any 
large amount by issuing popular loans. Continued 
resort was had during this year to the Imperial Bank, 
which not only discounted Treasury bills, but also helped 
the flotation of the war loans; indeed, the Bank itself 
subscribed two-fifths of each internal loan issued in 1915, 
or a total amount of about $700,000,000. 

During 1915 three internal war loans were issued. 
Russian war finance differed from that cf the other 
belligerents in making use of a series of comparatively 
small loans instead of large loans at less frequent inter- 
vals. The first of the three loans of 1915, that is, the 
second war loan, issued in March, was a five per cent. 
10-50-year bond issued at 94 ; subscriptions amounted to 
$257,000,000. Within two months the third loan was 
issued, which was a 5% per cent, bond issued at 99. 
This had two peculiar features which differentiated it 

''The dates given are those of the Gregorian calendar, which is 
15 days earlier than the Julian calendar. 

Ml 



WAR COSTS AND THEIR FINANCING 

from anything else in Russian finance or in that of any 
other country: (1) the rate of interest remained at 5% 
per cent, for only six years, after which it was reduced 
to five per cent.; (2) the bonds were redeemable at par 
in 1921, but if not presented at that time, did not mature 
until 1996."^ "Whether because these features made the 
loan particularly attractive or because it was better 
advertised, the subscriptions were double those of either 
preceding loan, reaching $515,000,000. This sum, to- 
gether with other receipts, sufficed the Government until 
November, when the fourth war loan was issued. This 
was a 51/2 per cent. 10-year bond issued at 95. The 
amount subscribed was the same as the third loan, 
$515,000,000. 

In addition to these long-term loans the Government 
also issued during 1915 seven series of short-term 
Treasury bills to a total of $1,625,000, four per cent, 
bills in March and August aggregating $275,000,000, 
and 'Q.Ye per cent, bills amounting to $1,350,000. Short- 
term Treasury bills amounting to $100,000,000 were dis- 
counted in Great Britain and France and unspecified 
credits created abroad during the year amounted to 
$3,162,500,000. 

The result of this exclusive loan policy was practically 
to double the debt in the year and a half since the 
beginning of the war. The Russian public debt had 
stood at $1,412,105,000 on January 1, 1911. A year later 
it was $5,236,786, but at the end of 1915, during which 
the Government made fall use of its borrowing power, 
the debt was raised to $9,438,315,500. 

The loan transactions of 1915 were as follows: 

''Prospectus of loan given in "Internal War Loans of Bellig- 
erent Countries," published by National Citv Bank. New York, 
1918, p. 51. 

178 



LOANS IN EUROPE 

Borrowing in Russia, 1915 
internal 

Second war loan, 10-50-year, 5 per cent $257,000,000 

Third war loan, 5-10-year, S^/o per cent 515.000,000 

Fourth war loan, 10 year, 5% per cent 515,000.000 

4 per cent. Treasury notes, March and August. . . 275,000,000 

5 per cent. Treasury bonds, Fob. 8, March 27, 

June 18, July 15, Aug. 26 1,350,000,000 

EXTERNAL 

5 per cent, short-term Treasury bonds, June 10, 

Sept. 9 400,000,000 

Unspecified credits, March 13, April 6, Oct. 9 3,162,500,000 

Total $6,474,500,000 

The loans thus far placed in Russia had been compara- 
tively small, but an effort was made during the next year 
to secure sums that would contribute measurably toward 
meeting the war costs. In March the fifth internal loan 
was issued, consisting of a 5i/2 per cent. 10-year bond 
issued at 95. The amount subscribed was $1,029,000,000, 
which was equal to the proceeds of the two preceding 
loans. Successful as this was, it was surpassed by the 
proceeds of the sixth war loan, issued in October on the 
same terms as the March loan, the yield of which was 
$1,544,000,000. As the net addition to the debt during 
the year 1916 was $3,172,103,000, it is clear that most 
of the money needed for war expenditure was being 
obtained from long-term bonds. There was left a bal- 
ance of only about $600,000,000 to be raised by short- 
term Treasury bills and similar obligations. During 
1916 the so-called '' dollar loan " of $50,000,000 was 
floated in New York, and Treasury bills were sold in the 
United States to the amount of about $35,000,000. Great 
Britain afforded the chief market during this period 
for Russian Treasury bills sold abroad, and France took 
the balance. The borrowings of 1916 are given in the 
following table : 

179 



WAR COSTS AND THEIR FINANCING 



BoKKOwiXG IN Russia, 1916 

Fifth war loan, lO-year, SVs per cent $1,029,000,000 

Sixth war loan, 10-year, 51/2 per cent 1,544,000,000 

Dollar loan in the ^United "States 50,000.000 

Treasury bills sold in England and France 600.000,000 



Total $3,223,000,000 

The year 1917 was marked by sucli kaleidoscopic 
changes of both a military and a political character that 
the mere narration of the loan transactions ceases to have 
any significance. In March the seventh war loan was 
issued in the form of a five per cent. 10-75-year bond 
issued at 85. There was here an approach to the French 
policy of selling a low-interest bond at a discount. Either 
because this feature made the loan more attractive or 
because the great inflation in the paper money had pro- 
vided people with more money than hitherto, the amount 
subscribed was the largest yet obtained, namely, 
$2,059,000,000. 

In March the revolution took place, and the new Gov- 
ernment was forced to raise funds to carry on its 
activities. For this purpose it offered a so-called Russian 
Liberty Loan of $1,500,000,000. This was a five per 
cent. 40-year loan, issued at 85, -of which half was 
secured from bankers and the rest was sold to the 
public. A credit was also obtained in the United States 
to a total of $365,000,000, and during the year 1917 
$187,729,250 of this was advanced to Russia. A credit 
of $333,000,000 was obtained in Japan through the sale 
of Treasury bills, the proceeds of which were used to 
pay for munitions bought in that country. 

Because of the disturbed political situation and the 
uncertain powers of the Provisional Government, little 
could be done in the way of securing revenue from 
taxation; consequently reliance was placed upon loans 

180 



LOANS IN EUROPE 

not merely for military, but for practically all expendi- 
tures of the Government. The public debt of Russia, 
which on January 1, 1917, amounted to $12,610,468,500, 
was estimated on September 7, 1917, to have more than 
doubled, standing then at $28,643,904,349. With the 
overthrow of the Provisional Government by the Bol- 
shevist regime and the repudiation by the latter of all 
foreign-owned debt, the issue of loans, of course, came 
to an end. A final survey shows Russian war borrowing 
to have taken the forms shown in the following table : 

Total Borrowing in Russia, 1914-1917 

Seven internal war loans $6,176,000,000 

Advances from Great Britain 2,840,000.000 

Advances from France on Treasury bills 1,085.000,000 

Advances from United States 187,729,750 

Advances from Japan on Treasury bills 333,000,000 

Private loans and credits in United States 162,500,000 

Advances from Bank of Russia by discount of 

Treasury bills 7,239.663,000 

Total $18,023,892,750 

Loans formed the mainstay of Italy's financial policy, 
although she made a valiant effort to enlarge her tax 
revenues. Resort was had both to Treasury bills and to 
long-term war loans. During the fiscal year ending June 
30, 1915, when Italy was busy preparing for the war 
although she was not actually engaged in it, the Treasury 
bills issued by the Government amounted to $309,700,000. 
During the following fiscal year the amount was only 
about half as great, or $145,000,000. The reason for 
the lessened resort to temporary borrowing was the flota- 
tion of war loans during this latter period. The so-called 
'' mobilization loan " issued in January, 1915, ante- 
dated Italy's formal entrance into the war, but it must 
properly be included in any estimate of war costs. This 

181 



WAR COSTS AND THEIR FINANCING 



was a 41/^ per cent. 10-25-year bond issued at 97. The 
amount subscribed was $200,000,000 nominal. The real 
war loans began with that issued in July, 1915, subse- 
quent loans making their appearance with clocklike 
regularity in each succeeding January. In the flotation 
of these loans the Government availed itself of the 
assistance of a syndicate of banks. 

The public debt of Italy practically trebled in the 
four years ending June 30, 1918, while the interest 
charge quadrupled in the same period. The growth of 
the debt and interest charges are shown in the following 
table : 

Growth in Public Debt of Italy, 1914-1918 





Public debt 


Interest charge 


1914 

1915 

1916 

1917 

1918 


$2,893,374,032 
3,273,743,460 
4,413,046,485 
5,992,206,192 
8,682,890,299 


$98,848,804 
109,998,237 
174,258,691 
254,818,892 
382,028,327 



These figures show only the funded debt, and are 
exclusive of the floating debt created by advances from 
banks, short-term Treasury bills, and other similar 
obligations, although short term obligations never 
played so prominent a part in Italian war finance as 
they did in England and Prance, because of the slighter 
financial development of Italy. The chief dependence 
for domestic supplies of capital was from the beginning 
placed on long-term loans. England and the United 
States supplemented these internal loans by credits 
aggregating $3,375,000,000. State note issues and 
advances from the three Italian banks of issue for 
Government needs supplied $1,700,000,000, and short- 

182 



LOANS IN EUROPE 

term Treasury bonds and Exchequer bills amounted to 
$1,600,000,000. The following table shows the forms 
taken by Italian borrowing during the war period: 

Total Borrowing in Italy, 1914-1918 

Mobilization loan, Jan., 1915 $200,000,000 

First war loan, July, 1915 , 229,200,000 

Second war loan, Jan., 1916 602,800,000 

Third war loan, Jan., 1917 797,100.000 

Fourth war loan, Jan., 1918 1,224,600,000 



$3,053,700,000 

State note issues $339,740,000 

Advances by bank notes issued.... 1^376,500,000 

— = 1,716 240.000 

Advances from Great Britain to April, 1919 2 065.000 000 

Advances from United States to April, 1919 1,521 500 000 

3-year and 5-year Treasury bonds 650 000 000 

3-year and 12-month Exchequer bills 1,950.000.000 

Private banking credit in United States 25.000,000 

Total $10,981,440,000 

The expenditures of the British Dominions which 
were met by the flotation of loans offered no distinctive 
features, and it is sufficient to list them in the general 
table on pages 184 and 185. 

The expenditures of the other active Entente countries 
were met chiefly by advances from their more powerful 
associates. Great Britain, France, and later the United 
States furnishing them with the funds and supplies they 
needed. Neither Belgium nor Serbia was in a position 
to float loans of their own, and Eumania seems to have 
made no attempt to do so. This method of subsidization 
can hardly be characterized as a loan policy. 

The original, carefully planned policy of Germany 
for financing the war relied chiefly upon loans and 
extensive use of bank credits. According to the plan 
announced by Dr. Karl Helfferich, Minister of Finance, 

183 



WAR COSTS AND THEIR FINANCING 



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185 



WAR COSTS AND THEIR FINANCING 

taxes were not to be imposed during the period of the 
war. They would not only be burdensome, but they 
would be unnecessary, for the German financial policy 
was based upon the assumption of a speedy victory and 
the collection of an enormous indemnity from the con- 
quered peoples. In the Reichstag on March 10, 1915, 
Dr. Helfferich proclaimed his financial policy as follows : 

The means of financing a modern war are substantially the 
following: first, the issue of loans; second, the use of the 
printing press for the issue of paper money; third, a reduc- 
tion of expenses, and war taxation. 

The main dependence of the German Government was 
on the first two. War taxation was not resorted to dur- 
ing the first year and a half of the war because, as Dr. 
Helfferich said, " we have a firm hope that after the 
conclusion of peace we shall present to our opponents a 
bill for the expenses of the war forced upon us." This 
theory of war finance was further elaborated in his 
budget speech of August 20, 1915, from which the fol- 
lowing significant sentences are taken: 



I explained in March the reason which determined the 
united 'Government against the imposition of war taxation 
during the period of the war. These reasons still stand. We 
do not desire to increase by taxation the hea^-j^ burden which 
war casts on our people so long as it is not absolutely 
necessary. ... As things are, the only method seems to 
be to leave the settlement of the war bill to the conclusion of 
peace, and the time after peace has been concluded. And on 
this I would say: If God grant us victory and with it the 
possibility of moulding the peace to suit our needs, we neither 
can nor Avill forget the question of costs. We owe that to 
the future of our people. The Avhole course of the future 
development of their lives must, if at all possible, be freed 

186 



LOANS IN EUROPE 

from the appalling burden caused by the war. Those who 
provoked the war, and not we, deserve to drag through the 
centuries to come the leaden weight of these milliards. . . . 
Moreover, all the country's expenditure on the war, with 
trifling exception, has remained in the country; it has gone 
to our soldiers, our agriculture, industry, undertakings, and 
workmen; it has served as payment to the last loan, and so 
gone to create new capital, the result of saving. 

There is involved in the last sentence the fallacy that 
if the money is only spent at home, it does not matter 
how great the debt may be. This theory dates back to 
the seventeenth century. It has been disproved by 
innumerable writers from the time of Hume to the 
present, but it seems to have lived on in Germany and 
to have influenced the financial policy of the war. 

The first needs of the Government were met by the 
issue of Treasury bills which were discounted by the 
Reichsbank. For the first two months the war was 
financed with money obtained from the war chest or 
from the Reichsbank. By the middle of September, 
1914, however, the floating debt had become uncom- 
fortably large, and it was funded by the issue of a loan. 
This was done in pursuance of a carefully devised policy 
for financing the war by means of the issue of short- 
term Treasury bills and other obligations and then fund- 
ing these at half-year intervals into long-term bonds. 
Every six months from the beginning of the war the 
German Treasury regularly issued a popular loan in 
September and March. Details concerning the war loans 
were published in great fullness and probably may be 
accepted as accurate, although no allowance was made in 
the gross yields of the loans for funding of Treasury 
bills or other short-term obligations. The table on page 
188 shows the nine war loans issued during the war. 

187 



WAR COSTS AND THEIR FINANCING 









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188 



LOANS IN EUROPE 

The first war loan was unquestionably a success and 
measured the war spirit of the German people. Dr. 
Helfferich declared that the amount subscribed, which 
was $1,220,250,000, was twice as large as had been 
expected, and that the proceeds would meet the needs 
of the Government to the end of the fiscal year 1915. But 
war expenditures were increasing so rapidly that after 
paying off part of the outstanding Treasury bills the 
proceeds lasted only until December, 1914, when the 
Government was forced to resort to a new issue of 
Treasury notes. Although a considerable part of .this 
loan was taken by banks, corporations, and State insur- 
ance organizations, there was also a large number of 
subscriptions from small investors. The participation 
in the loan had been provided for and facilitated by 
the creation of '' loan offices " which were authorized 
to make loans on securities and even merchandise that 
would not be acepted as collateral by commercial banks. 
The following quotation from a leading German news- 
paper, which may be regarded as a semi-official spokes- 
man for the Government, explained on the occasion of 
the third loan how this could be done :^ 

It is not necessary that one should have actual gold or 
silver, and anyone possessing anything can participate, 
whether they have ready cash or not. If you have money 
in the bank, simply withdraw it for the purpose of 
subscribing. ... 

If you hold securities you will find it easier still to raise 
money. It is not necessary to sell them; you simply borrow 
money against them at any " Reichs-Darlehenskasse " or at 
any large bank. And as you will receive almost as much 
interest on the war-loan stock, or even more interest than 
you pay to the lending bank, you will be nothing out of 
pocket. You must, however, hand over to the bank the 

^ Kolnische Zeitung, Sept. 2, 1915. 

189 



WAR COSTS AND THEIR FINANCING 

securities against which the money is advanced to you and 
the bank will retain them until the loan is repaid. No loss 
can ensue from the above mentioned procedure. Or at the most 
it could only be one-quarter per cent, per annum in the inter- 
est, if, as is the case with the Beichs-Darlehenskassen, you pay 
514 per cent, on the borrowed money whilst jou receive 
five per cent, on the war-loan stock and even this possible 
loss Avill subsequently be made good in view of the fact that 
you pay only 99 marks for each 100 marks of war-loan stock 
for which 100 marks will be repaid in full. . . . 

If you have already subscribed to the first or second war 
loan and paid in full for the same, you can at once partici- 
pate in the present issue. All you need to do is take your 
stock — or, if you have not yet received the stock, the receipt 
for the amount paid — to a bank, which will advance to you 
75 per cent, of the nominal value, so that if you have 400 
marks old w^ar loan, jou can subscribe 300 marks in the new 
issue without paying a single pfennig. You can even sub- 
scribe four times this amount, i. e., 1,200 marks, if you will 
also leave with the bank the stock that you take in the new 
loan, in which case you will have given the bank as security 
400 marks of old war loan and 1,200 marks of the new 
war loan, together 1,600 marks, against a loan of 1,200 marks. 

There is here explained in remarkably clear, untech- 
nical languagie a system of. pyramiding. By this 
arrangement an initial investment of 10,000 marks based 
in the first instance on the hypothecation with a loan 
office of possibly unmarketable securities, would enable 
a total subscription to the nine war loans of 36,997 
marks with no additional cash payment. If, as has 
been abundantly proved by the course of events, a war 
can be paid for only by the increased production or the 
saving and self-denial of the people, it is difficult to see 
how such a policy as that just described could lead to 
anything except inflation and self -stultification. It was 
a case of endeavoring to lift one's self by one's own 
boot straps. The power of the German Government and 

190 



LOANS IN EUROPE 

the blockade of the Allies forced the German people to 
practice economy and to finance the war out of their 
past accumulations and current production. But the 
theory of war finance here outlined made no appeal 
to the citizen to curtail nonessential consumption or 
to save the sums necessary to invest in war loans — in 
fact, every effort was made to avoid reference to such an 
unpleasant necessity. It took some time for the peoples 
of the various belligerent countries to realize that the 
only effective subscriptions to war loans were those paid 
for out of savings and not those financed by the easy 
method of borrowing at a bank. But in Germany the 
opposite theory was officially promulgated and reli- 
giously followed. The increasing yield of the successive 
war loans thus becomes a measure, not of the effective 
support of the war in terms of commodities and service, 
but rather a measure of the progress of inflation and of 
success in pyramiding. 

No change was made in the fiscal policy of the German 
Government in the year 1916.^ War expenditures were 
still to be met by means of loans. The inflation of the 
currency still continued, and although new taxation was 
introduced, it was not sufficient to meet even the interest 
on the new war debt. The easy method of financing the 
war by means of borrowing and the use of the printing 
press, however, was by now showing some of its bad 

' Not only was no change made, but adherence to the exclusive 
loan policy was thus made the occasion of congratulation to the 
country by Dr. Helfferich: 

" Germany is the only belligerent power which has covered her 
total war expenditure by long-term loans. That a nation of 
70,000.000. cut off from the outer world by arbitrary acts in con- 
flict with international law, should have borne for 20 months the 
heavy burden of the war, and should now again be offering to the 
Fatherland more than 10.000.000,000 marks, is proof of greatness 
bevond praise of words." (Quoted in the Independent, April 17, 
1916, p. 100.) 

191 



WAR COSTS AND THEIR FINANCING 

effects. Whatever might have been urged in its favor 
as a scientific policy for a short and victorious war lost 
its force as the war lengthened and the debt piled up. 
The costs of the war, moreover, were growing steadily. 
Whereas the monthly costs had been estimated at 
$500,000,000 in 1916, they had risen by the end of 1917 
to $750,000,000. 

The year 1917 marked a new departure in the case 
of the Treasury bills that were offered for sale. These 
were made redeemable by drawings at 110, which was a 
high premium to pay the subscriber. The Imperial 
loans were issued at practically the same price in all the 
nine issues and bore the fixed rate of interest of ^we 
per cent. It was a matter of considerable self-glorifica- 
tion on the part of German waiters that they were able 
to sell successive issues of war bonds practically at par 
without resorting to higher rates of interest, as in the 
case of Great Britain, or to reduction in price, as in the 
case of France. The real explanation of Germany's 
apparent ability to maintain her credit unaffected by 
the vast loans she made is to be found in the methods 
pursued to induce people to purchase bonds with the 
proceeds of baaik loans. As money could be easily bor- 
rowed, not only from commercial banks but also from 
the loan offices especially established for this purpose, 
and upon every conceivable form of security, no one 
could offer the excuse of inability to buy. Add to this 
the social and governmental pressure, amounting in the 
case of the later loans to practical compulsion, and the 
flotation of successive loans at nearly par is suffi- 
ciently explained. The deception practiced upon the 
mass of the people as a result of the inflationist policy 
may have served to maintain the ruling class in power 
a little longer than would otherwise have been possible, 

192 



LOANS IN EUROPE 

but it was a terribly expensive way to secure a short 
reprieve. 

By August 1, 1917, after three years of war, the 
Imperial debt had passed the limit of $25,000,000,000 
which Rudolph Havenstein, the President of the Reichs- 
bank, thought was all that Germany could stand and 
which he was sure would never be reached. If this 
figure be compared with the modest debt of the Empire 
before the war, $1,250,000,000, some measure of the 
financial burden thus far imposed upon the Empire can 
be realized ; and even this figure, large as it is, does not 
take into account the large and growing debts of the 
several states and of the municipalities. 

The year 1918 saw no change in the fiscal war policy. 
Loans and the issue of notes still formed the chief 
dependence of the Treasury, little additional use being 
made of taxation; in fact, the costs were growing so 
rapidly that the financial situation was by this time 
quite out of hand. By March, 1918, the monthly war 
cost had risen to $937,500,000. The desperate drive of 
the spring on the western front undoubtedly brought 
the average for the next few months beyond the 
$1,000,000,000 mark. The impending collapse of Ger- 
many was indicated by the falling off of both the total 
amount subscribed and the number of subscribers to 
the ninth war loan, which was issued in September, 
1918. Both of these factors had shown, on the whole, 
a fairly steady progression in the first eight loans, 
although there were some fluctuations. But the ninth 
war loan recorded a tremendous fall from the previous 
high record, particularly in the number of subscribers. 
This ended the loan policy of the war. 

Germany's war borrowings may be summarized as 
far as disclosed in the table on page 188, The 

193 



WAR COSTS AND THEIR FINANCING 

Total Boerowing in Germany, 1914-1918, as Disclosed by the 
Imperial Government 

Nine war loans $24,640,419,925 

Treasury bills furnished Turkey, Bulgaria, etc... 1,500.000,000 

Treasury bills discounted at Reichsbank 6,776.700.000 

Loans in the United States 10,000,000 

Total $32,927,119,925 

effectual concealment of the true state of affairs in 
German finance is indicated by the later startling 
disclosure of the existence of a floating debt of $18,000,- 
000,000, instead of the $8,277,000,000 set down in the 
above table. That such an enormous debt of this char- 
acter should have accumulated is the strongest possible 
indictment of the loan policy pursued by Germany. In 
spite of the vaunted success of the popular loans it is 
now clear that they produced less than 60 per cent, of 
the amount needed. As no resort was made to taxation 
during the war for meeting the costs of the war, when 
the loans failed the Government was forced to issue 
Treasury bills. That it should have been considered 
necessary to conceal the existence of this floating debt 
simply affords additional evidence of the utter break- 
down of Germany's loan policy. 

In view of this disclosure it becomes necessary to 
construct a new table of war borrowings of Germany: 

Total Borrowing in Germany, 1914-1918, Including True 
Floating Debt 

Nine war loans $24,640,000,000 

Floating debt 18,000,000,000 

Loan in the United States 10 000.000 

Total $42,650,000,000 

The loans made by Austria-Hungary followed a pre- 
arranged plan, as did those of Germany. They were 

194 



LOANS IN EUROPE 

issued at half-year intervals every November and May, 
following the German loans at an interval of about two 
months. As in Germany loans constituted the main 
dependence for meeting the cost of the war. In dis- 
tinction from the German policy, however, the proceeds 
of the loans were not used primarily to repay any part 
of the advances of the Imperial Austro-Hungarian 
Bank or to fund the outstanding Treasury bills, but 
were also applied to the payment of contractors and 
other needs, while the floating debt was renewed. This 
was the practice at least during the early part of the 
war. In floating their loans the Austrian and Hun- 
garian Governments relied, as they had done in times 
of peace, exclusively upon bank consortiums. The war 
loans in these countries were never so truly popular as 
they were in other countries, if we may judge by the 
number of subscriptions. In a large part the issues must 
have remained in the possession of the banks themselves. 

Although the results of the war loans were published 
in considerable detail by the Government on the occasion 
of each flotation, no allowance was ever made for the 
conversion of outstanding short time obligations. As 
these were received in partial payment of the loans, how- 
ever, some allowance must be made for this factor, 
although it is impossible to give exact figures. The 
totals, therefore, are somewhat misleading. In most of 
the other nations the amount of '' fresh money " 
obtained was stated; not so in Austria-Hungary. The 
table on pages 196 and 197 shows the amounts of the 
various issues with the rates of interest, issue prices, and 
dates of maturities. 

The other Teutonic allies, Turkey and Bulgaria, fol- 
lowed only too willingly the example of their master. 
Loans were floated by both countries both at home and 

195 



WAR COSTS AND THEIR FINANCING 



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197 



WAR COSTS AND THEIR FINANCING 

abroad, and paper money was freely issued, but the 
main source of supply of both the Turkish and Bulgarian 
treasuries was the German Government by which the 
war in both countries was largely financed. So far as a 
policy can be discerned in the case of these two coun- 
tries it was distinctly a loan policy. 



r 



CHAPTEE VII 



LOANS IN THE UNITED STATES 



War-finance prooiam of the United States — The First Liberty 
loan — The Second Liberty loan — The Third Liberty loan — 
The Fourth Liberty loan — The Victory Liberty loan — War 
savings and thrift stamps — Advances to the Allies. 

During the 33 months between the outbreak of the 
war in Europe and the entrance of the United States 
the industries of this country were to a considerable 
extent adjusted to supplying the war needs of the 
belligerents. Manufactures, agriculture, mining, and 
other branches of industry had shown a tremendous 
expansion; gold flowed into the country; foreign-owned 
securities were returned and absorbed; trade balances 
piled up in favor of the United States in foreign and 
neutral countries; shipping made an advance greater 
than that of the previous generation. Profits had 
doubled, tripled, and quadrupled ; steel, $19 a ton before 
the war, had gone to $44; from $9 a ton southern pig 
iron rose to $17 ; copper went from 11 cents to 44 cents 
a pound; flax soared from $400 to $1,300 a ton; and 
many other commodities reached unprecedented price 
le\^ls. 

The admonition of the Administration to the banks at 
the end of 1916 not to overload with non-liquid foreign 
Treasury bills sounded a note of warning, and the 
financial institutions began to put their houses in order. 
The loans of the Federal reserve banks were reduced 
from $222,000,000 at the beginning of the year 1917 to 
$168,000,000 at the time of our entrance into the war. 

199 



WAR COSTS AND THEIR FINANCING 

Large numbers of Federal reserve notes were printed- 
and distributed to the subtreasuries throughout the coun- ! 
try, so that they would be readily available in the event j 
of need. When war was declared on April 6, 1917, the 
banking system of the United States was in the strongest 
possible condition. The production of the country had 
reached the highest point ever attained ; the gold supply 
was the greatest in the history of the nation. The| 
United States was now a creditor instead of a debtoi 
nation, and the foreign loans made by its citizens to] 
belligerents amounted to over $2,912,000,000. The posi- 
tion of the Treasury was also strong. The tax legislation 
of the past three or four years had provided it with 
machinery that permitted an easy and prompt expan- 
sion of revenue. The Government debt was small, its 
credit stood at a high point, and Government expendi- 
tures had remained practically stationary. 

In spite of all this, however, the world-wide inflation 
and high prices which now prevailed created problems 
of war finance for the United States in 1917 that had 
not presented themselves to the other belligerents in 
1914. During this interval there had been a serious 
fall in the purchasing power of the dollar. This is 
clearly shown by the changes in the following index 
numbers : 



Increases in Index Numbers, 1914-1917 



Authority- 


July, 1914 


April, 1917 


London Statist 


100 
100 
100 
100 
100 


213.0 


London Economist 


210 8 


Bradstreet 


174.5 


U. S. Bureau of Labor, wholesale prices 
U. S. Bureau of Labor, retail prices 


172.7 
142.0 



200 



LOANS IN THE UNITED STATES 

It was necessary for the United States to enter upon 
its war-finance program on the highest pinnacle of 
prices and on a rising commodity and labor market. 
The same measure of achievement, which in 1914 would 
have cost $10,000,000,000, in 1917 called for practically 
twice that amount. On the other hand, the United States 
had the benefit of the three years' experience of the dif- 
ferent European exehequer.s; their mistakes we could 
avoid and from them we borrowed ideas freely, adapting 
to our peculiar needs the ways and means worked out by 
them sometimes at great cost. Advantage was taken of 
Great Britain's costly experience in handling the con- 
scription problem, especially with respect to the system 
of deferred classification. So, too, in the framing of 
revenue legislation the curtailment of credits for non- 
essential industries, the rationing program, the issue 
of war savings certificates, and the insistence upon 
national thrift — these and many other lessons were 
learned from Europe's experience. The war had de- 
veloped by this time to a point at which the necessary 
machinery of finance was definitely established. The 
best financial methods had been tested out, and the 
necessity of a complete mobilization of all the economic 
forces of the nation was realized. 

The war-finance program of the United States was 
definite and well conceived. Heavy taxes were to be 
imposed at once, and the difference between tax revenue 
and the cost of the war was to be raised by loans. The 
end af the fiscal year on June 30, 1917, disclosed that 
about one-third of the war expenditures had been met 
out of revenue and the other two-thirds out of loans, 
and this ratio was adopted by the Secretary of the 
Treasury the following year as the principle that should 
govern the distribution of the burden between the two. 

201 



WAR COSTS AND THEIR FINANCING 

This theory was clearly stated in a letter written by 
]\Ir. McAdoo to Claude Kitchin, Chairman of the Ways 
and Means Committee of the House, on June 5, 1918 1"- 

In the fiscal year ending June 30, 1918, our cash disburse- 
ments will amount to between $12,500,000,000 and $13,000,- 
000,000. Of this amount about one-third will have been 
raised by taxes and two-thirds by loans, all of which will be 
represented by long-time obligations — that is, bonds of the 
first, second, and third Liberty loans and war savmgs 'certifi- 
cates. We shall thus have completed fifteen months of the 
war with a financial record unequaled, I believe, by any 
other nation. ... . 

If I may, without impropriety, offer a suggestion as ta 
the proposed revenue measure, I should recommend: 

(1) That one-third of the cash expenditures to be made 
during the fiscal year ending June 30, 1919, be provided by 
taxation. According to my estimates, this would involve 
raising eight billion dollars through taxation. 

(2) That a real war-profits tax at a high rate be levied 
on all war profits. ... . . i 

(3) That there should be a substantial increase m the 
amount of normal income tax upon so-called unearned 
incomes. ... 

(4) That heavy taxation be imposed upon all .uxuries. 

To secure the necessary loans the Treasury at the 
beginning adopted a method which later hardened into 
a definite policy. This was the issuance by the Treasury 
of short term certificates of indebtedness which were 
issued in anticipation of the long term loans and later 
of tax payments, and their subsequent funding by the 
flotation of long-term loans. The transactions m certifi- 
cates of indebtedness during the period of the war 
are recorded in the table on pages 204 and 205. The 

* Annual report of the Secretary of the Treasury, 1918, pp. 
47", 49. 

202 



LOANS IN THE UNITED STATES 

Treasury placed these certificates through the 12 
Federal Reserve Banks, which acted as its fiscal 
agents and which undertook the marketing of the 
5 loans. The general plan was for the Treasury 
to notify the banks in advance of the amounts it 
would require, and the necessary percentage of 
resources was then set aside by the banks to take 
up the Treasury certificates. These when issued 
were allotted in quotas to the respective banks, the 
quotas being based upon the total resources of the banks 
in the system in the different' districts. The amounts 
accruing from the sale of these certificates were placed 
to the credit of the Government in the purchasing banks, 
and the Government in turn designated these same 
banks as its depositaries, drawing on its credit as need 
arose for the payment of wages, supply bills, and other 
expenditures. As the Government warrants were in 
turn deposited, frequently in the same banks, there was 
involved in this method only a transfer of credits. 
When the proceeds of the Liberty Loans were paid in, 
the outstanding certificates were liquidated and addi- 
tional credits in favor of the Government were estab- 
lished. In this way the process of financing the war 
was distributed over the whole financial system, certifi- 
cates being gradually placed, credits being gradually 
absorbed, and as funds to meet loan subscriptions came 
in, outstanding certificates being cancelled and surren- 
dered. Transactions involving the turnover of billions 
of dollars were thus carried through with a minimum of 
friction and of disorganization of the money market. 

Although this method of certificate borrowing enabled 
the Treasury to secure the needed funds without business 
derangement, it undoubtedly exercised an unfortunate 
influence by tending toward inflation. As carried out 

203 



WAR COSTS AND THEIR FINANCING 



Certificates of Indebtedness Issued by the Treasury 
Department, 1917-1919 



Date 



Maturity 



Anticipating 
First Loan: 

1917: AprU25 
May 10 
May 25 
June 8 

Anticipating 
Second Loan: 

1917: Aug. 9 
Aug. 28 
Sept. 17 
Sept. 26 
Oct. 18 
Oct. 24 

Anticipating 
Third Loan 

1918: Jan. 22 
Feb. 8 
Feb. 27 
Mar. 20 
April 10 
April 22 

Anticipating 
Fourth Loan 

1918: June 25 
July 9 
July 23 
Aug. 6 
Sept. 3 
Sept. 17 
Oct. 1 



June 30 . 
July 17, 
July 30. 
July 30. 



Nov. 15 . 
Nov. 30. 
Dec. 15. 
Dec. 15. 
Nov. 26. 
Dec. 15. 



Inter- 
est, per 
cent. 



April 22 . 
May 9. 
May 28. 
June 18. 
July 9. 
July 18. 



Anticipating 
Fifth Loan 
1918: Dec. 
Dec. 
1919: Jan. 



Oct. 24... 
Nov. 7. . . 

Nov. 21 

Dec. 5 

Jan. 2, 1919 

Jan. 16 

Jan. 30 



3 
3 
31 
3i 



31 

3i 

3^ 

4 

4 

4 



4 

4 

4^ 

41 

4i 

41 



4^ 

4^ 
^ 

41 
41 
^ 



41 
4^ 
4^ 

20? 



Amount 
of issue 



$268,205,000 
200,000,000 
200,000,000 
200,000,000 



Total 



S868,205,000 



300,000,000 
250,000,000 
300,000,000 
400,000,000 
385,197,000 
685,296,000 



400,000,000 
500,000,000 
500,000,000 
543,032,500 
551,226,500 
517,826,500 



$839,646,500 
753,938,000 
584,750,500 
575,706,500 
639,493,000 
625,216,500 
641,069,000 



$613,438,000 
572,494,000 
751,684,500 



2,320,493, 



3,012,085,^ 



4,659,820,00C 



LOANS IN THE UNITED STATES 



Certificates of Indebtedness— Co nimwecZ 



Date 



Jan. 16 
Jan. 30 
Feb. 13 
Feb. 27 
Mar. 13 
April 10 
May 1 



Maturity 



Inter- 
est, per 
cent. 



4i 
4i 



^2 

4* 



Amount 
of issue 



600,101,500 
687,381,500 
620,578,500 
532,381,500 
542,197,000 
646,025,000 
591,308,000 



In anticipation of income and profits taxes, 1918. . 
In anticipation of income and profits taxes, 1919. . 

To secure Federal reserve bank notes 

Special issues 



Total. 



Total 



6,157,589,500 
1,624,403,500 
3,354,787,500 
255,475,000 
7,733,635,903 



$29,986,494,903 



in practice, the certificates taken by tlie banks were paid 
for largely by the creation of credit Government 
deposits. Since no reserves must legally be held by the 
banks against such Government deposits, the restraint 
upon credit inflation ordinarily imposed by this require- 
ment was lacking. It would be going too far to attribute 
to the Treasury system of anticipatory borrowing ^ an 
inflation which took place as a result of a tremendous 
expansion of business and of Government expenditures 
far in excess of the savings of the people. But there 
was a real inflation of the credit currency of the country 
beyond monetary needs, with a consequent harmful 
effect upon prices. 



^ For a severe criticism of this policy see J. H. Hollander, 
War Borrowing: A Study of Treasury Certificates of Indchted- 
7iess of the United States (New York, 1919), ch. v, 

205 



WAR COSTS AND THEIR FINANCING 

The marketing of the war loans, as already noted, was 
also handled through the 12 Federal Reserve Banks, and 
here also the same method of allotting quotas based upon 
banking resources was followed. A highly perfected 
selling organization was created in each district, which 
took subscriptions in three- or four-weeks drives and 
endeavored to place with the general public the bonds 
allotted to the district. There were few cases where 
failure of the people to subscribe their full quota was 
registered, and every loan was oversubscribed. The 
banks acted as fiscal agents for the Government, receiv- 
ing payments and distributing the bonds when paid for. 

Advances to allies in a total amount of $10,000,000,- 
000 were authorized by the first four Liberty Loan Acts. 
This was a new departure in United States Government 
finance and attracted unusual attention. The machinery 
by which it was carried through had consequently^ to be 
devised to meet the requirements, and was the result of 
much careful study. The Secretary of the Treasury 
was authorized to establish credits in favor of allied 
Governments and to the extent of the credits so estab- 
lished to purchase at par their obligations, which should 
bear the same rate of interest and contain in essentials 
the same terms and conditions as the United States 
bonds issued for this purpose. Short term or demand 
certificates of indebtedness were received from the 
foreign Government in exchange for a Treasury war- 
rant of the United States for an equivalent amount. The 
sum thus received from the United States would then be 
distributed by the foreign Government among various 
banks, and the credits thus established would be drawn 
upon for the purchase of supplies as need arose. In 
order that purchases by the Allied Governments might 
be made in the most efficient manner possible without 

206 



LOANS IN THE UNITED STATES 

bringing them into competition with one another or with 
the United States Government, a commission called the 
Inter- Allied Purchasing Commission was created through 
which all purchases by the Allied Governments in the 
United States were made. The interest on the demand 
obligations of the foreign Governments was first fixed at 
three per cent, per annum, but shortly thereafter it was 
increased to 3i/4 per cent, in order to conform with the 
rate paid by the United States Treasury on its certifi- 
cates of indebtedness. Subsequently the rate was raised 
to 31/2, ^Vi, and finally five per cent. 

The war loans differed in certain essential respects in 
the successi\^ issues, but all the bonds had several im- 
portant features in common. They were issued at par. 
All except those of the Third Loan had an optional date 
of redemption prior to the date of maturity. Interest 
was payable semi-annually. Each issue provided for 
coupon or registered bonds at the option of the sub- 
scriber; the coupon bonds were issued in denominations 
from $50 to $10,000, and the registered bonds in denomi- 
nations from $50 to $100,000 except in the case of the 
First Loan, in which the minimum was $100. Both 
principal and interest were payable in gold coin of the 
present standard of weight and fineness. The period of 
subscription for each loan was fixed at practically four 
weeks. Subscriptions were received by the Treasury, 
the subtreasuries, the Federal Reserve Banks, the 
national and state banks and trust companies, and many 
private banks, firms, corporations and other organiza- 
tions. Finally, subscriptions were payable, at the elec- 
tion of the subscriber, in full or in installments over a 
ten-months period. These were the similarities. The 
differences between the various loans will be noted in 
the following more detailed descriptions. 

207 



WAR COSTS AND THEIR FINANCING 

The First Liberty Loan Act of April 24, 1917, author- 
ized a bond issue of $2,000,000,000 and advances to aUies 
of $3,000,000,000. Authority was also given the Secre- 
tary of the Treasury to issue certificates of indebtedness 
to an amount equal to the Liberty Loan at not less than 
par, at a rate of interest not exceeding 3% per cent., 
and running for a period not longer than one year. In 
order to provide funds to meet the inmiediate needs of 
the Government until the proceeds of the First Loan 
should become available, the Secretary of the Treasurj^ 
began at once the sale of Treasury certificates, the first 
issue bearing date of April 25, 1917." Between this 
date and June 8 four issues were made, aggregating 
$868,305,000. The maturities of these early issues were 
limited to 60 days. 

Subscriptions to the First Liberty Loan were opened 
on May 14, 1917, and closed on June 15. The bonds 
were 319 per cent. 15-30-year bonds dated June 15, 1917, 
maturing June 15, 1947, but redeemable after 1932 on 
three months' notice. They were tax-exempt except for 
estate and inheritance taxes. The bonds were converti- 
ble into similar bonds at higher rates if such bonds 
were issued in the future. The amount offered was 
$2,000,000,000. This sum was settled upon by the 
Treasury Department after careful consultation with 
experts, of whom '' many students of finance and men 
experienced in large bond operations believed that the 
first issue should not exceed $1,000,000,000 and some 
thought that the first loan should not exceed $500,000,- 
000."* The controlling consideration, however, was the 
essential requirements of the Government and the neces- 

* The dates, maturities, interest rates, and amounts of the vari- 
ous issues of certificates of indebtedness will be found in the 
table on pages 204 and 205. 

* Report of the Secretary of the Treasury, 1917, p. 6. 

208 



LOANS IN THE UNITED STATES 

sities of the Allies, which made a large sum Imperative. 
Even this proved insufficient, however, and the Treasury 
was compelled to resort again to the issue of certifi- 
cates of indebtedness in August. Expenditures which 
had averaged $65,000,000 a month for the year prior to 
the war, were over $750,000,000 for August, 1917, in- 
cluding advances to Allies. Having fallen behind at the 
beginning, the Treasury was never able to overtake the 
rapidly grbwing expenditures, but was forced to antici- 
pate each successive loan by issues of certificates of 
indebtedness in advance of the actual flotation. Thus, 
by November 15, 1917, when the Second Liberty Loan 
was issued, the certificates outstanding amounted to 
$2,320,493,000. 

It was realized that to float so large an issue as the 
First Loan it would be necessary to make a direct appeal 
to the people, and a most effective selling organization 
was built up for this purpose which continued to func- 
tion with great success throughout the war. The first 
step was that of the education of the American public 
on the nature of bonds as an investment and on its duty 
to subscribe as a matter of patriotism. The bond-holding 
public in the United States then numbered less than 
350,000. Every city, town, or village that boasted a 
bank now developed a bond-selling organization. For 
this purpose the 12 Federal Reserve Banks, which are 
fiscal agents of the Government, were used as the basis. 
Each of the 12 Reserve banks appointed a committee of 
representative business men to act as a central Liberty 
Loan committee in the respective districts, and they in 
turn appointed subcommittees in each of the larger 
towns and cities. Extensive publicity and subscription 
campaigns were inaugurated and carried through by 
these committees, which received the cooperation of 

209 



WAR COSTS AND THEIR FINANCING 

existing organizations and of new ones created especially 
for this purpose. The American Bankers' Association 
offered its services, and large numbers of experienced 
bond salesmen were enlisted in the work of selling Lib- 
erty bonds. 

In the four-weeks drive which ushered in the First 
Loan, subscriptions amounting to $3,035,236,850 were 
secured from 4,500,000 subscribers. This oversubscrip- 
tion of 52 per cent, was unexpected, and as the Treasury 
had announced that it would accept only the amount of 
the loan asked for, it pro-rated the subscriptions, allotting 
smaller ones from $50 to $10,000 in full and the larger 
ones at varying ratios which ran down to 20 per cent, 
on the largest subscriptions. The First Loan registered 
the attitude of the American people toward popular 
loans and gave promise of larger possibilities for the 
future. 

The needs of the Treasury and of the Allied countries 
were calling for enormous sums even beyond the original 
estimates of the Treasury. The loans to the Allies were 
averaging about $450,000,000 a month, and by Novem- 
ber 1, 1917, they had reached a total of $2,717,200,000. 
Domestic requirements for the same period were about 
$1,635,000,000. These sums were far in excess of the 
revenue receipts, even supplemented by the proceeds of 
the First Liberty Loan, and it was necessary to issue 
large amounts of certificates of indebtedness. By 
November the amount outstanding was over $2,00,000,- 
000, and accordingly the Second Liberty Loan was 
authorized to fund this floating debt and to provide 
additional capital. 

The Second Liberty Loan, authorized by the Act of 
September 24, 1917, consisted of an offering of 

210 



LOANS IN THE UNITED STATES 

$3,000,000,000 in four per cent. 10-25-year convertible 
gold bonds dated November 15, 1917. The great differ- 
ence between this issue and the preceding one lay in the 
fact that the tax-exempt feature was considerably 
modified. There was perhaps no other provision of the 
first issue that had called forth such hostile criticism as 
the exemption of the bonds from taxation. The classic 
argument in favor of the exemption of Federal bonds 
from taxation had always been that a tax-exempt bond 
would sell at a higher figure and thus yield a larger 
return to the Government. If, on the other hand^ the 
Government should tax its own securities, it would lose 
in the interest rate or in the issue price what it would 
gain from taxation. In either case, so the argument 
ran, the aggregate sum would be the same, and there 
was nothing to be gained, therefore, by subjecting Gov- 
ernment bonds to taxation. Although this may be true 
under normal conditions, with proportional taxes, when 
the rate of taxation remains unchanged, it did not hold 
at this time when the taxes were progressive and when 
the rates were being frequently increased. The very 
heavy surtaxes on incomes introduced in the War 
Eevenue Act of October, 1917, immediately placed a 
premium on the tax-free bonds of the first issue. They 
were termed the '' rich man's bonds," as they were 
purchased in large quantities by wealthy persons who 
desired to evade the income tax by placing their invest- 
ments in tax-free securities. It has been estimated by 
an eminent financial authority that investment in 31/2 
per cent, tax-exempt Liberty bonds was equal to a simi- 
lar investment in a taxable security yielding the follow- 
ing returns :^ 

^Letter from Otto H. Kahn in 'tsew Republic, June 9, 1917, 
p. 161. 

211 



WAR COSTS AND THEIR FINANCING 

5.02 per cent, in respect of incomes over $100,000 per annum. 

5.93 per cent, in respect of incomes over 200.000 per annum. 

7.07 per cent, in respect of incomes over 300.000 per annum. 

7.82 per cent, in respect of incomes over 500.000 per annum. 

8.75 per cent, in respect of incomes over 1.000,000 per annum. 

9.21 per cent, in respect of incomes over 2,000,000 per annum. 

The possession of tax-exempt bonds accorded an advan- 
tage to the large-income taxpayer which was not shared 
by the recipient of small incomes. But since the loan 
was purchased by both income groups, the price was not 
enhanced by the full amount of the exemption granted, 
and consequently the gain to the Government from the 
loAver interest rate was not as great as the loss in revenue 
from the income tax. A change, therefore, was deemed 
essential in the tax-exemption feature in order that the 
bonds might be of the same value, so far as taxation was 
concerned, to all investors and in order that they might 
make the widest possible appeal. For these reasons 
the new bonds were made subject to the super-income 
taxes and excess-profits taxes, and by way of compensa- 
tion the rate of interest was increased to four per cent. 
The bonds issued under the Second Liberty Loan Act 
were exempted, principal and interest, from all taxation 
except (1) estate or inheritance taxes and (2) graduated 
super-income taxes and excess-profits and war-profits 
taxes. At the time of the passage of the Act this phras- 
ing of the law was strongly criticized on the ground 
that these bonds too would be tax-exempt unless, or 
only so long as these Federal taxes should be retained. 
The interest on $5,000 principal in this issue was also 
exempted during the life of the bond from the taxes 
enumerated under (2) above. The bonds carried a con- 
version privilege, but only into the next issue of higher- 
interest war bonds. 

The Treasury announced that it would allot additional 
212 



LOANS IN THE UNITED STATES 

bonds up to one-half of any oversubscription. Subscrip- 
tions opened on October 1 and closed on October 27. 
The campaign, which was similar to that carried on 
during the first loan, but more widespread and intense, 
resulted in total subscriptions of $4,617,532,300 from 
9,400,000 subscribers, this being 54 per cent, over- 
subscription. In accordance with the announcement of 
the Treasury only 50 per cent, of the oversubscription 
was accepted, and the total amount allotted was 
$3,808,758,650. All subscriptions between $50 and 
$50,000 were allotted in full, and the larger subscribers 
received from 90 to 40 per cent, of their subscriptions. 
The loan was in every respect a remarkable success. 
Its distribution was twice as wide as that of the First 
Loan, and over 73 per cent, of the loan was paid in full 
on November 15. It must be said, however, that a larger 
resort to borrowing at the banks for the purpose of 
making subscriptions was noticeable during the placing 
of this loan than had been the case in the first. On 
November 23, 1917, after the effect of the loan was 
reflected in the bank returns, the Federal Reserve Banks 
shovved total holdings for member banks and their 
clients, as assets and as collateral, of $355,392,000, which 
measured the credit granted for the purchase of war 
paper. In order to facilitate the operations of member 
banks in placing the bonds in the hands of actual in- 
vestors the Federal Reserve Banks established a rate for 
the rediscount of customers' loans collateraled by 
Government bonds or Treasury certificates of indebted- 
ness equal to the interest rate on the bonds. The amount 
of 31/2 per cent, bonds of the First Liberty Loan con- 
verted into four per cent, bonds was only $568,320,050, 
showing that the exemption from taxation was regarded 
by most of the holders as of greater value than the 

213 



WAR COSTS AND THEIR FINANCING 

increase in the interest rate. The bonds issued upon 
conversion retained the date of maturit}^ the terms of 
redemption, and the interest-payment dates of the 3I/2S, 
but otherwise had the provisions of the new issue. 

During the next few months the rapidly growing costs 
of the war, the rising labor market, and the heavy 
prospective demands both for domestic requirements and 
for the needs of the Allies all combined to make impera- 
tive the curtailment of every unnecessary draft on 
credit. It was clear by this time that the slogan ' ' busi- 
ness as usual " was both fallacious and dangerous. 
Business must be readjusted to the war-making function 
of the nation. Monthly expenditures, including ad- 
vances to the Allies, were steadily mounting, and 
for April, 1918, reached the then record total of 
$1,215,287,119. The proceeds of the Second Loan had 
long since been exhausted ; issues of Treasury certificates 
in anticipation of a third loan had begun on January 22, 
and by April 22 had been sold to an amount of 
$3,012,085,500. In addition to these, certificates of 
indebtedness in anticipation of the June taxes were sold 
to the amount of $1,621,403,500. The condition of the 
Treasury and the approaching maturities of outstanding 
certificates of indebtedness, $400,000,000 of which fell 
due on April 22, made it necessary to consider the 
offering of another Liberty loan. 

Acting under authority of the Act of April 4, 1918, 
the Treasury now issued $3,000,000,000 in 4% per cent. 
10-year inconvertible gold bonds. In the issue of this 
Third Liberty Loan the discussion centered about the 
rate of interest. The bonds of the previous loan were 
selling below par, and the return on industrial and 
other bonds was such as to make it doubtful in the 

214 



LOANS IN THE UNITED STATES 

minds of many whether even a 41/2 per cent. Govern- 
ment bond could be floated at par. The Treasury, 
however, " stood firm in the belief that the rate of 
interest itself would not maintain bonds at par in the 
financial market; that the price of Liberty bonds, even 
though quoted at less than par on the exchanges, would 
not deter the American people from buying at par the 
same bonds when offered by their Government to secure 
the necssary funds to carry on the war; that the 
patriotism of the American people was not measured by 
interest rates, nor determined by the fluctuations of 
Government bonds on stock exchanges."^ In other 
words, the patriotism of the American people was to be 
relied upon rather than the investment merits of the 
bonds. 

It was hoped that the increase in the interest rate to 
414 per cent, would result in stabilizing the interest 
rate so far as this was possible, and would permit the 
elimination of the conversion feature which in itself had 
a tendency to create a demand for a constantly rising 
rate of interest on successive issues. Great Britain by 
her wholesale policy of conversion had thus lost all the 
advantage of the lower interest rates at which she had 
placed her earlier issues. The bonds of the third issue, 
like those of the second, were tax-exempt except as to 
(1) estate and inheritance taxes and (2) the surtaxes 
on income, excess-profits, and war-profits taxes; also, 
v.s in the second loan, income from $5,000 principal was 
exempt from these three latter taxes. 

The Third Liberty Loan was offered to the public on 
April 6, 1918, the first anniversary of America's 
declaration of war, and the selling campaign continued 
to May 4. A slogan of this campaign was *' Borrow 

® Report of the Secretary of the Treasury, 1918, p. 6. 

215 



WAR COSTS AND THEIR FINANCING 

to buy." The situation was a very complex one; the 
former issues were quoted on the market below par, and 
the provision regarding inconvertibility in the new issue 
proclaimed that no higher rate of interest would be 
paid. Every effort, therefore, was put forward to ensure 
the success of the loan. The banks extended credit 
facilities for 90 days to " borrowers-to-buy ' ' at the same 
rate of interest as that borne by the bonds. The 
great selling organization, numbering over 2,000,000 
voluntary workers from ex-Secretaries of the Treasury 
to 10-year-old Boy Scouts, reorganized its work; groups 
became responsible for their individual members; the 
whole country was mapped out; the quotas assigned to 
the Federal reserve districts were reallotted by states, 
by counties, by municipalities, by wards, by blocks, and 
even by single buildings. Social forces were so mar- 
shalled as to exert pressure upon the laggard; publicity 
was pitilessly used; buttons and posters given to sub- 
scribers as a sort of receipt served to differentiate the 
slacker from the patriot and at the same time economized 
the efforts of the sellers and saved the subscriber from 
repeated solicitation. The great lists of former drives 
were checked over against ward rosters and precinct and 
poll lists, and the missing were tabulated and sought 
out. Four-minute men invaded every form of public 
entertainment, restaurant, and meeting, and there took 
subscriptions. As a result nearly every home in the 
United States numbered at least one subscriber. The 
total number of subscribers was 18,308,325, with sub- 
scriptions of $1,176,516,850. 

But the " borrow-to-buy " policy tended to put a 
severe strain upon the banks. On April 5, the day 
before the opening of the subscription campaign for the 
Third Liberty Loan, the war paper in the Federal 

216 



LOANS IN THE UNITED STATES 

Reserve Banks stood at $304,075,000. ByADril?fi ,.,i 
the high-water „.ark in thi^ re pec ZtZiel' 71T 
secured by war paper totaled $642,429 000 o 71 2 n 

f , '• , ^'^'^ proportion was reduced until the end «f 
July, after which it began to rise again. The financia 

noS "rt' ' ''"^ «^--* inflation ndc"" 
possible check was used to remedy the situation 

eeolr^erettre. T^f r thT^ ~1 
^;.r taxation restricted retail P^eC;" L'^L nl 

aovernment offic' ^J' rfsSicTed t^g^ S ^Spitl 
Issues Committee the flnM^nr. ^ Capital 

Thi« Pn •./ r notation of new security issues 

Its procedure was to lend funds tn +1, I 1 created, 
themselves advanced funds to war ill' ies ThiThI 

of commercial banking on liquid securities and at ^h 
same t.me it prevented private enterpr e from bidd n ' 



WAR COSTS AND THEIR FIXAXCIXG 

Liberty Loan no oversubscription had been accepted, 
and in the case of the Second, only 50 per cent, of the 
oversubscriptions were taken by the Treasuiy. Hence 
the financial institutions that had underwritten large 
blocks of bonds were relieved of the heavier part of the 
burden by the allocation of- the full amounts of their 
subscriptions to the small subscribers. Tnis had the 
effect of cutting the subscriptions of the banks to com- 
paratively small amounts. Thus, in the case of the First 
Loan the total subscriptions of the national banks were 
$3tl:0,000,000, and the allocation on subscriptions was 
only $180,00.000, of which probably half was passed 
on to subscribers who purchased their bonds on the 
instalment plan. In the case of the Third and Fourth 
Loans, however, no such immunity was possible, as the 
Government announced that it would accept the full 
amount of the subscriptions; the banks, consequently, 
became the owners of large amounts of Government 
bonds. The effect of the third Liberty Loan on the 
condition of the banks in this respect is shown by the 
increase in holdings of Government securities by the 
national banks from $2,120,649,000 on March -4, 1918, 
to $2,657,523,000 on May 10. 

In one other respect the Third Loan differed from 
either of the previous ones, namely, in the provision for 
a bond-purchase fund. This authorized the Secretary 
of the Treasury until one year after the termination 
of the war to purchase bonds in the open market not to 
exceed in any one year one-twentieth of the amount 
outstanding. The purchase was not limited to the Third 
Loan but extended also to the bonds of the first and 
second issues. The purpose of this provision was to 
prevent the price of the bonds, which were quoted at 
less than par and showed a further downward tendency, 

218 



LOANS IN THE UNITED STATES 

from sinking further. During the period between the 
enactment of the law on April 4, 1918, and October 31 
following, bonds to a total amount of $344,036,500 were 
purchased, cancelled, and retired.'^ This action un- 
doubtedly exercised a beneficial effect on the price of 
outstanding issues, but the propriety of using the pro- 
ceeds of the loans for this purpose may be questioned. 
On this point the language of the author already pub- 
lished in another place may be quoted :^ 

As a measure of debt redemption it may be justified on the 
ground that the Government, even though it was still in the 
market as a borrower, was buying its old bonds at a discount 
while it planned to sell new ones, bearing the same rate of 
interest, at par. As a method of maintaining, or endeavoring 
to raise, the market price to an artificially high level it is 
open to objections. But as a means of preventing a sudden 
or violent decline, whether accidental or engineered by specu- 
lators, an authorization of this sort is probably desirable. 
The English Exchequer has had the same power conferred 
upon it by Parliament. Obviously, it ought to be employed 
with the greatest possible care and the large use made of 
this expedient by the Treasury is in no small measure due to 
the low rate of interest of the loans. 

A loan policy which should utilize the patriotic fervor of 
a people, stimulated by the contagious enthusiasm of a loan 
" drive," and then attempt to maintain an artificial price by 
manipulating the market, in order to sell bonds at an unduly 
low rate of interest, would be open to severe criticism. 
Assuming that such a policy were possible, the bad effects 
would at once become apparent upon the return of peace 
when Government support would be withdrawn as no longer 
necessary. The price of the bonds might then fall to normal 
levels and an undeserved loss be inflicted upon such holders 
as might be compelled to sell them before maturity. . . . 
Such a procedure, if pursued by a Government, would un- 

' Report of the Secretary of the Treasury, 1918, p. 71. 
* Report of the Committee on War Finance of the American 
Economic Association, p. 81. 

219 



WAR COSTS AND THEIR FINANCING 

doubtedly affect its credit when it next appeared as borrower 
upon the money markeft.* 

Scarcely had the Third Liberty Loan been completed 
when the Treasury began preparations for further credit 
operations. Expenditures had outdistanced revenues by 
such a wide interval that the proceeds of each succeeding 
loan yielded a smaller and smaller amount of clear 
money. Having run behind at the beginning, the 
Treasury had never been able to catch up, and had been 
compelled to resort in ever increasing volume to antici- 
patory borrowing by means of certificates of indebted- 
ness. Expenditures, now running over $1,500,000,000 a 
month, were estimated by the Secretary of the Treasury 
at $27,718,128,900 for the fiscal year ending June 30, 
1919, whereas ordinary receipts were estimated at 
$6,846,900,000. A fourth loan was inevitable in the 
fall, but it was hoped to finance operations during the 
summer by further issues of short term Treasury certifi- 
cates. Accordingly the Fourth Liberty Bond Act was 
passed on July 9, 1918. 

The Federal Reserve Banks were notified on June 12 
that bi-weekly allotments of $750,000,000 of certificates 
of indebtedness would be made to a possible total of 
$6,000,000,000, and they were requested to arrange their 

' Other countries, as Great Britain and France, made similar 
eflforts to maintain the market, but the most effective measure for 
supporting the price of Government bonds was worked out in 
Canada. There all dealings in Government war bonds were pro- 
hibited except through a Loan Committee formed to deal in them. 
Commissions were paid to brokers to bring in buying orders, and 
prices were advanced from time to time until the market was 
brought up to par. The plan, however, could scarcely be adopted 
in the United States because its effect was to deny the bonds a 
free market, which might seriously react on further new loans, 
or would require the expenditure of such stupendous sums by the 
Government itself to deal in the self-created market that it would 
merely result in borrowing to buy, 

220 



LOANS IN THE UNITED STATES 

$6,000,000,000, and as fiscal agents were '' authorized 
and requested to receive subscriptions up to an aggre- 
gate "^^ specified for each district. Member and other 
banks were notified to this effect, and beginning with 
June 25 subscribed for themselves or distributed to their 
clients seven issues, which on October 1 totalled 
$4,659,820,000. 

The Fourth Liberty Loan consisted of $6,000,000,000 
in 41/1 per cent. 15-20-year inconvertible bonds, dated 
October 24, 1918. Conditions in the financial market 
had changed since the Third Loan, and it was feared 
that the rate of interest, which at that time the Secre- 
tary of the Treasury hoped had been stabilized at 414 
per cent., would no longer prove sufficiently attractive 
to secure the enormous sum which it was now proposed 
to ask. Moreover, the surtaxes to which the interest on 
bonds was subject had been extended downward to 
incomes of $5,000 while the rates had been doubled, thus 
cutting the income from bonds very materially to larger 
groups of taxpayers. The Bending Revenue Act of 1918 
again doubled the surtaxes. The Secretary of the Treas- 
ury, in advocating before Congress the imposition of 
higher normal taxes on incomes, to which the interest 
on Liberty bonds was not subject, pointed out as an 
incidental advantage that such a course would undoubt- 
edly make the bonds of the fourth issue attractive to 
investors without at the same time increasing the inter- 
est rate for the life of the bond. As the normal tax rate 
was now 12 per cent, under the pending Revenue Act, 
it made the bonds not subject to it a very favored form 
of investment for people with incomes not subject to 
surtaxes. The successive increases in the rate of the 
normal tax therefore had the effect of increasing the 

" Announcement of the Secretary of the Treasury. 

221 



WAR COSTS AND THEIR FINANCING 

value of the bonds for those who desired a tax-exempt 
investment, and thus of keeping down the rate of inter- 
est. As long as the revenue requirements of the Gov- 
ernment necessitated the progressive raising of the rate 
of the normal income tax, the market value of the bonds 
would probably not fall much below par. 

There is no doubt that the exemption of the interest 
of the Liberty bonds from normal income taxes, together 
with the block exemptions from surtaxes, helped to 
maintain the market price of the bonds. Inasmuch as 
the latter exemption varied somewhat as between the 
different bond issues there was a certain amount of dis- 
crimination. But it may fairly be admitted that con- 
stant increases in the interest rates would have intro- 
duced still more serious discrimination, unless the privi- 
lege of conversion of the law-interest-bearing bonds into 
those with higher rates had been granted, in which case 
the advantages of the sale of the earlier issues at lower 
interest rates would have been lost to the Treasury. 
This happened in Great Britain, where interest rates 
were increased to make the later issues more marketable. 

But not merely were the bonds to be made attractive 
for persons with incomes not subject to surtaxes; an 
effort was also made to prevent holders of blocks of 
former issues who would naturally be subject to surtaxes 
from marketing their bonds and to induce them to 
purchase additional bonds of the Fourth Loan. For 
this purpose a provision was inserted in the Bond Act 
of September 24, 1918, exempting until two years after 
the termination of the war the interest on $30,000 of 
bonds of the Fourth Liberty Loan in the hands of any 
taxpayer from surtaxes and excess profits and war 
profits taxes. The taxpayer who subscribed for $30,000 

222 



LOANS IN THE UNITED STATES 

of these bonds and still held them at the time of making 
his tax return would also receive an exemption from 
such taxes after January 1, 1918, on an aggregate 
amount of $45,000 of bonds of the two previous loans, 
and subscribers in lesser amounts would receive propor- 
tionate and similar exemptions. These exemptions were 
in addition to those already granted. The effect of 
these block exemptions, together with the operation of 
the bond-purchase fund, had the effect of holding the 
issues up to a price only slightly below par. 

The Fourth Liberty Loan was offered for subscription 
on September 29, 1918, and the books were closed on 
October 19, The campaign for this loan was even 
more highly organized than the third, but it was carried 
out under the more discouraging handicap of the 
epidemic of Spanish influenza. Necessarily a campaign 
of crowds, it suffered from the enforced closing of public 
places under the orders of various health departments. 
The efforts of the four-minute men w^ere restricted to 
street corners, automobile trucks, and such other out- 
door platforms as were available. Receipts and badges 
of honor, besides the usual buttons, were given to sub- 
scribers. In lieu of the great public appeals house to 
house canvasses were made. The organization of over 
2,000,000 volunteer workers, in spite of all handi- 
caps, worked tirelessly during the three-weeks drive. 
In the middle of the campaign the workers, doubting 
the possibility of raising so huge a sum in the unfavor- 
able circumstances, canvassed their lists again for 
'' plus " subscriptions, asking former subscribers to 
increase their amounts. The slogan of the campaign 
was " Give until it hurts. '* Strong appeals were made 
by the press, and banks again agreed to furnish the 
needed credit facilities to enable subscribers to finance 

223 



WAR COSTS AND THEIR FINANCING 

their purchases by borrowing. In spite of all handicaps 
the loan ^' went over the top," resulting in total sub- 
scriptions of $6,993,000,000 from 21,000,000 subscribers. 
The effect of this loan on the assets of the banks was 
noteworthy, as their offer to extend credit to purchasers 
of bonds was widely accepted. The result was an increase 
in the so-called war paper held by the Federal Reserve 
Banks from the then record mark of $685,000,000 on 
August 2, 1918, to $1,467,322,000 on December 6, after 
the full adjustment of the loan had taken place in the 
discounts of the Federal Reserve Banks. It is clear that 
the banks in the United States plaj^d a role in financing 
the war not very different from that assumed by the 
great European banks. Purely commercial banking 
functions were for the time being subordinated to the 
necessities of the Government, and although it is impos- 
sible to say to what extent the banks passed on this load 
to permanent investors in Liberty bonds, it must be 
accounted a weakness in Ga\'ernment finance, as well as 
a danger to the banks themselves, that their resourCfes 
should ha^^ been drawn upon to such a large extent. 

Within a little more than three weeks after the 
placing of the Fourth Liberty Loan the Armistice was 
signed and military operations were suspended. The 
loan yielded sufficient funds to retire the $4,600,000,000 
of certificates of indebtedness outstanding and to leave 
a balance of $2,000,000,000 for further needs. The 
signing of the Armistice on November ]1, however, by 
no means ended war expenditures; in fact, the cancella- 
tion of war contracts under the break clause entailed 
heavy financing, and the maintenance of two million men 
in France and their transportation back to the United 
States caused expenditures to reach their highest peak 

224 



LOANS IN THE UNITED STATES 

in December, 1918, when they amounted to $2,060,975,- 
855. By the end of January, 1919, the Secretary of the 
Treasury estimated in a statement to the House Com- 
mittee on "Ways and IMeans that the expenditures for 
the first seven months of the fiscal year amounted to 
$12,954,498,537; at the end of March they totaled 
$15,164,224,227. It was evident that in the face of such 
enormous outlays the balance of the Fourth Loan, sup- 
plemented though it was by revenue receipts, would not 
suffice to meet current expenditure. Financing by 
certificates of indebtedness in anticipation of the Fifth 
Liberty Loan had been begun as early as December 5, 
1918, and between that date and March 13, 1919, eight 
issues were made, totaling $4,920,256,500. 

The months following the signing of the Armistice 
saw the first steps taken toward a readjustment of in- 
dustry and Government finance to a peace basis. 
Government control of industry was relaxed by the 
gradual contraction of the activities of the various war 
boards, the cessation on December 31 of the work of the 
Capital Issues Committee, and the decision of the Gov- 
ernment to discontinue financing foreign Governments 
beyond the existing credits of $10,000,000,000. Owing, 
however, to the continuation of the blockade and the 
lack of shipping and the necessarily slow process of 
demobilization, it was not possible for the industries of 
the country immediately to resume their pre-war 
activities. 

The new Revenue bill, which had originally provided 
for annual revenues of $8,000,000,000, was modified after 
the signing of the Armistice so as to yield an estimated 
revenue of $6,000,000,000 for the fiscal year 1919. It 
became law on February 24, 1919, barely in time to 
allow the making out of the schedules of the income 

225 



WAR COSTS AND THEIR FINANCING 

tax, the first installment of which was due on March 15. 
This installment amounted to over $1,000,000,000, of 
which $800,000,000 was absorbed by maturing certifi- 
cates of indebtedness. It was necessary for the Treasury, 
therefore, to continue its reliance upon the banks until 
another loan could be floated. The Federal Reserve 
Banks had from 70 to 80 per cent, of their total resources 
invested in war paper, and the necessity for another war 
loan to fund these short term obligations grew from 
day to day. It is indeed difficult to overestimate the 
severe strain placed upon the banks of the country 
during the early months of 1919 by the fourfold neces- 
sity of providing funds to pay taxes, of absorbing the 
successive issues of certificates of indebtedness, of 
extending commercial credits necessary to put war 
industries on a peace basis, and, finally, of placing the 
new war loan. 

The Fifth Liberty Loan, known as the Victory Liberty 
Loan, was authorized by Congress on March 3, 1919, but 
practically all details as to interest rate, maturity, and 
other features were left to the discretion of the Secretary 
of the Treasury, the amount alone being limited by 
Congress to a maximum of $7,000,000,000. After a sur- 
■vey of the financial situation and an estimate of the 
probable demands on the money market for the 
rehabilitation of peace industries, the Secretary of the 
Treasury announced that the new loan would be limited 
to $4,500,000,000, that no oversubscription would be 
accepted and that no further loan would be asked. This 
loan was to consist of S% per cent, tax-free bonds or 
4% per cent, notes, subject, as in the three preceding 
loans, to the estate and the graduated super-income, 
excess-profits and war-profits taxes, but with block 
exemptions as in previous loans, and in addition an 

226 



LOANS IN THE UNITED STATES 

exemption from the last three taxes of the interest on 
$20,000 principal of bonds, but not to exceed three 
times the amount of notes owned at the next tax return. 
The 4% per cent, taxable notes were convertible into 
ilie 3% per cent, tax-free notes and these in turn were 
freely convertible into the other form. The new notes 
were dated May 20, 1919, and matured May 20, 1923, 
the interest being payable semiannually in June and 
December, with the right of redemption in the Govern- 
ment in 1922. A wider market for the new loan was 
sought to be created by exempting the war-loan obliga- 
tions of United States from all taxation when in the 
hands of nonresident aliens, in the hope that neutrals 
might thereby be induced to invest, especially in those 
countries where the exchange was adverse to the United 
States. The Fifth Liberty Bond Act also created a 
cumulative sinking fund composed of (1) 21/2 per cent, 
of the aggregate amount of bonds and notes outstanding 
on July 1, 1920, less the amount of foreign obligations 
due to the United States held by the Treasury, and (2) 
the amount which would have been payable for interest 
on such bonds or notes as may have been retired. It 
was estimated that under the operation of this pro- 
vision the war debt of the United States would be 
expunged in 25 years. The expired privilege of con- 
version of the 4 per cent, bonds into 4^/4 per cent, 
was revived by this Act. Finally, the War Finance 
Corporation was empowered to issue bonds to the 
amount of $1,000,000,000 for the purpose of providing 
credit with which to promote commerce with foreign 
nations, such credit to be advaneed^^ to American 

"Down to May 10, 1920, when further advances were sus- 
pended by order of the Secretary of the Treasury, about 
$31,000,000 had been loaned. 

227 



WAR COSTS AND THEIR FINANCING 

exporters, or to financial institutions in turn making 
advances to sucli exporters, for appropriate periods up 
to a maximum of five years. 

The total subscriptions to the Victory Liberty Loan 
amounted to $5,2-i9,908,300 — an oversubscription of 
16.66 per cent. In accordance with the terms of the 
issue the oversubscription was rejected and the sum 
originally asked for, $4,500,000,000, was allotted among 
the subscribers. Those subscribing up to and including 
$50,000 received the full amount, and the subscribers 
to larger sums received from 80 to 42.39 per cent, of 
their subscriptions. The number of subscribers was 
11,903,895, which was 11.3 per cent, of the population. 
Although this showed a considerable falling off from 
the high record of the Fourth Liberty Loan, it was 
regarded as a satisfactory response in view of the fact 
that hostilities had now ceased and the appeal for funds 
now rested upon other grounds than those which had 
prevailed during active war. 

The form of Government borrowing known as war 
savings certificates was authorized by Congress on Sep- 
tember 24, 1917, and was put into effect on December 3 
of the same year. Although modeled on the English 
plan of the same name, it marked an improvement over 
its prototype. In Great Britain the adjustment of inter- 
est was controlled by the date of purchase, the variation 
of maturity resulting therefrom being very cumbersome. 
According to the plan adopted in the United States, the 
war savings stamp of a face value of $5 maturing on 
January 1, 1923, was sold during the month of January, 
1917, at $4.12, and the purchase price increased one cent 
each month thereafter during the year. This made the 
yield four per cent, per annum, compounded quarterly. 

228 



LOANS IN THE UNITED STATES 

Under the United States plan there was also issued a 
thrift stamp which sold for 25 cents but which bore 
no intei^st. To the purchaser of these stamps a folder 
spaced for 16 stamps was given which represented when 
filled an investment of $4. This could then be exchanged 
for an interest-bearing certificate by payment of the 
excess over $4 in the price of the war savings certificate 
for the current month. 

The first Act limited the amount of war savings cer- 
tificates to $2,000,000,000, the holdings of any one indi- 
vidual to $1,000, the amount purchasable at any one 
time to $100. This later limitation was repealed by the 
Act of September 24, 1918. Later the law was amended 
so as to make the limit of $2,000,000,000 apply to each 
annual series, a series being issued in 1919 to mature 
in 1924, and another in 1920 to mature in 1925. 

The campaign for the sale of war savings certificates 
and thrift stamps opened on December 3, 1917, under 
the supervision of the National War Savings Committee. 
State, county, city and town committees were organized 
throughout the country, and a canvass for subscriptions 
was begun, less feverish than, but equally persistent with, 
those of the loan drives. Individuals were pledged to 
buy certain specified amounts weekly or monthly, and a 
nation-wide campaign in the interest of thrift and 
economy was inaugurated. The clamor for " business 
as usual," of which so much had been heard at the 
beginning of the war, was now opposed by the doctrine 
of saving and investing. At first progress was slow, 
but the efforts of the committees were finally effective. 
This form of Government borrowing reached down to 
the purses of the smallest wage-earner and even to 
school children. The financial returns from this source 
were by no means negligible, as the yield for the calendar 

229 



WAR COSTS AND THEIR FINANCING 

year 1918 was $962,677,118,^- but the lessons of per- 
sonal thrift and economy which were instilled during 
the progress of this campaign must be regarded as even 
more valuable. Although evolved as a form of war 
finance, because of the beneficial social results it has 
been found desirable to retain the system as a feature 
of normal Government borrowing. 

That economic and financial strength were equally 
important with military operations in determining the 
outcome of the war had been fully shown by the time 
the United States entered the conflict. The drain 
upon the European nations had been terrific, and 
although the Entente Allies had borrowed from private 
sources in the United States the enormous aggregate of 
$2,912,395,287 down to April, 1917, the European 
belligerents were perilously near the point of financial 
exliaustion. The most important immediate contribu- 
tion made by the United States to the cause of the 
Allies was the extension of credits by this Government. 

After April 6, 1917, the financing of the Allies ceased 
to be the function of private enterprise and was taken 
over by the United States Government. The Bond acts 
authorized the purchase at par from the Allies of the 
United States of their obligations bearing the same 
rate of interest (first Act only) and containing the 

^-The steady .srowth in the sale of war sarino:? and thrift 
stamps is shown by the follo'^iving table of receipts into the 
Treasury from this source bv months to the end of 191S: 

December. 1917 ... $10,236,451' Julv. 1918 211.417.942 

January. 1918 ... 25.559.722 August, 1918 129.044.200 

February, 1918 .. 41.148.244 September. 1918 .. 97.614,581 

March. 1918 53.967.864 October. 1919 89.084.097 

April. 1918 60.972.984 Xovember. 1918 .. . 73.689.846 

May, 1918 57.956.640 i December, 1918 .. 63.970.813 

June, 1918 58.250,485 

I Total $972,913,869 

230 



LOANS IN THE UNITED STATES 

same terms and conditions as tlie obligations of the 
United States issued under each Act. The method by 
which these advances were made was to establish credits 
with the Treasury for specified amounts, which were 
then applied to the purchase in this country of 
foodstuffs, raw materials, and munitions of war. The 
foreign Government would deliver to the Treasury its 
short-term obligations conforming in amount and matur- 
ity with the Treasury certificates issued to provide the 
funds. As these obligations accumulated, the foreign Gov- 
ernment from time to time converted them into its de- 
mand notes. The interest was adjusted on the different 
forms of short- or long-term obligations so as not in any 
case to be less than the prevailing rate which the United 
States was paying its citizens for the funds it loaned to 
the foreign Governments. These credits w^ere finally 
fixed by the fourth Bond Act at $10,000,000,000, of which 
$9,711,739,636 had been allotted by June 30, 1920. 
The distribution of this sum among the various belliger- 
ent Governments is shown in the following table : 



Advances to Allies by the United States to June 30, 1920 

Belgium $350,428,794 

Cuba 10,000,000 

Czecho Slovakia 4,277,000,000 

France 3,047,974,777 

Great Britain 4,277,000.000 

Greece 48,236,629 

Italy 1,666,260,180 

Liberia 5,000.000 

Rumania 25,000000 

Russia 187,729,750 

Serbia 26,780.465 

Total $9,711,739,636 

In order to prevent undesirable competition among the 
different Allied Governments — and between them and 

231 



WAR COSTS AND THEIR FINANCING 

Disbursements of the United States During the War 



Month 


Foreign 
loans 


Total 
disbursements 


1917: March 




$99,950,799 


April. 


$200,000,000 
407,500,000 
277,500,000 
452,500,000 
478,000,000 
396,000,000 
480,700,000 
471,929,750 
492,000,000 
370,200,000 
325,000,000 
317,500,000 
287,500,000 
424,000,000 
242,700,000 
343,485,000 
279,250,000 
282,150,000 
489,100,000 
278,949,697 
■ 389,052,000 
290,250,000 
145,397,302 
322,350,000 
409,608,608 
194,911,857 
54,750,000 


289 893 953 


May 

June 

July 


526,565,555 
412,723,486 
662,310,845 


August 


757 , 457 , 364 


September 


746,378,285 


October 


944 , 368 , 752 


November 


986,081,807 


December 


1,105,211,859 


1918: January 


1,090,356,045 


February 


1,012,686,985 


March . ... 


1 , 155 , 793 , 809 


April 


1,215,287,779 


May 


1,508,195,233 


June 


1,512,572,700 


July 


1,608,282,654 


August 


1,805,512,223 


September 


1,557,264,285 


October 


1,664,862,260 


November 


1,935,249,308 


December 


2,060,975,855 


1919: January 


1,962,350,949 


February 


1,189,913,903 


March .... 


1,379,801,786 


April 


1^428,928,306 


May 


1,112,337,472 


June 


809,389,950 



the United States — for supplies produced in this 
country, a board known as the Inter- Allied Purchasing 
Commission was constituted in August, 1917, for the 
purpose of expending the advances made. Through the 
cooperation of this Commission and the War Industries 
Board the purchases of the Allies were coordinated with 
those of the United States. 

The extension of these credits to the Allies placed a 
continuous strain upon the finances of United States. 

232 



LOANS IN THE UNITED STATES 

During the last nine months of the year 1917 the 
monthly advances averaged over $400,000,000. This 
figure declined somewhat during the next year after 
the direct contributions of the United States in men and 
supplies became greater, but the average for the year 
1918 was well over $300,000,000 per month. The monthly 
advances, together with the total disbursements of the 
United States Treasury, are shown in the table on page 
232. 

Congress having failed to provide for a continuance 
of Government advances to Allies during the period of 
reconstruction, further advances of credit to foreign 
Governments or individual enterprises now becomes the 
concern of private banking in the United States. During 
the continuance of the war the Government alone could 
have met the enormous demands of the Allies, but it was 
felt that with the termination of actual hostilities further 
financial assistance might better be left to business 
interests. During the period of actual war Government 
control of these advances was necessary as the labor and 
materials of the United States had to be rationed accord- 
ing to a unified and coordinated program which 
would take into account the joint needs of all the bel- 
ligerents, but during the period of economic reconstruc- 
tion the best interests of industry will probably be 
served if the granting of credits is placed upon a 
commercial, rather than a military or political, basis. ^" 

"See Chapter XI for further discussion of the problem of 
financing Europe after the war. 



CHAPTEE yill 

TAXATION IN EUROPE 

Vigorous use of taxation in England — Slight results in France, 
Russia, and Italy — Reasons therefor — Inadequacy of taxa- 
tion by the Central Powers. 

The contrast between American and British policy, on 
the one hand, and that of Germany and her allies, on the 
other, is more striking in respect of war taxation than in 
any other aspect of war finance. The United States and 
Great Britain were the only two nations that raised 
sufficient funds by taxation to meet even the ordinary 
civil expenditures and the interest charges on the war 
debt. These two countries made an earnest effort also 
to meet at least a part of the war costs by taxation. But 
even these nations fell short of the high ideal which an 
able student has defined for the financial management 
of a war, that it should be a '* tax policy assisted 
by credits, rather than a credit policy assisted by 
taxes. ''1 

Germany, on the other hand, not only made no effort 
to meet any part of her expenditures out of taxation, 
but at the very outset of the war announced a definite 
policy embodying this view. '' We do not," declared 
the Finance Minister, Dr. Helfferich, *' desire to in- 
crease by taxation the heavy burden which war casts on 
our people." Other nations have followed this principle 
in short struggles, but this was the first time that it had 
been dignified by adoption as a definite policy of war 
finance. The war was to be fought on credit, and the 

* Henry C, Adams, Science of Finance, p. 542. 

234 



TAXATION IN EUROPE 

settlement of the bills was to be deferred until after 
the conclusion of peace. The complete breakdown of 
the loan policy has already been described, but an 
account of the inadequate and belated tax measures 
gives further point to that analysis. 

The other nations stood between these two extremes, 
though it must be confessed that most of them conformed 
rather with the German than with the Anglo-American 
example. In their case, however, it was not so much 
the result of conscious policy as of political incapacity 
or sheer economic inability to raise the necessary taxes. 
So rapidly and enormously did expenditures increase 
that even the interest on the new loans outran the war 
revenues. The efforts of the Continental Entente 
Treasuries were directed towards meeting in any fashion 
the augmenting costs. Of principle there is little trace 
to be found in their operations, for they were simply 
swept along in a maelstrom of uncontrollable expendi- 
tures without ability to direct their course. If they 
could keep their heads above water, they did well. In 
the circumstances European war finance was simply a 
series of hand-to-mouth expedients. 

The British policy of financing the war may fairly 
be described as a tax policy assisted by credits, though 
at all times the dependence upon loans was far greater 
than the resort to taxation. In view of the unprece- 
dented expenditures which the Government was called 
upon to meet, this was inevitable, but on the whole 
Great Britain followed the time-honored principle that 
as large a share as possible of the war costs should be 
met out of taxation. At the time of the Napoleonic 
and Crimean Wars the proportion of costs thus defrayed 
out of taxes had run as high as 47 per cent., but during 

235 



WAR COSTS AND THEIR FINANCING 

the World War the proportion averaged about 25 per 
cent, of the total expenditures. 

As a result of old-age pensions and other social legis- 
lation on behalf of the working classes, the expenditures 
of Great Britain had grown rapidly during the years 
preceding the war, and with them her tax revenues. 
For the fiscal year ending March 31, 1914, the revenues 
had been $991,214,485, and the expenditures, $987,464,- 
840. For the following year the budget of May 4, 1914, 
had proposed new taxes amounting to about $67,995,000 
for the purpose of carrying out the program of social 
reform and of relieving local taxation of some of its 
burdens. The Finance Act enacting these proposals into 
law was passed on July 31, 1914, four days before war 
was declared against Germany. This Act fixed the rate 
of the income tax at Is. 2d. in the pound, or 6I/4 per 
cent., at which it had stood for some five years past; 
imposed a tax of 5d. a pound on tea; and revised and 
increased the death duties. It was estimated that these 
changes would bring the total revenue for the fiscal 
5-ear 1915 up to about $1,035,000,000. 

When war broke out, the immediate needs of the 
Treasury were met by the discount of Treasury bills 
and a resort to credit, but taxation for war expenditures 
was not long delayed. On November 17, 1914, the first 
war budget was presented by David Lloyd-George, the 
Chancellor of the Exchequer. In his budget speech he laid 
down certain principles concerning war financing which 
were to guide Great Britain during the next four years : 



It is easier to raise taxes in a period of war and to lower 
them in a i3eriod of peace, than it would be to raise even 
lower taxes in a period of peace. . . . It is a time of 
danger when men part willingly with anything in order to 

236 



TAXATION IN EUROPE 

avert evils impending on the country tliey love. . . . Every 
twenty millions raised annually by taxation during this period 
means four or five millions taken off the permanent burdens 
thereafter imposed on the country. 

The tax proposals consisted of a doubling of the rate 
of the income tax and the imposition of an additional 
duty on tea of 3d. per pound and of an additional duty 
of 17s. 3d. per barrel on beer, making a total of 25s. in 
all on this beverage. The taxes on tea and beer nov7 
amounted to about 80 per cent, of their original cost. 
The nev7 taxes were to run only for the remainder of 
the fiscal year to March 31, 1915, when a new budget 
would make more permanent provision for the burdens 
of war. It was estimated that the additional duty on 
tea would yield $4,750,000 in that period; the beer duty, 
$7,500,000; and the increase of the income tax and 
supertax, $62,500,000; but a reduction of the license 
fee was made to compensate for the tax on beer, which 
lessened the revenue from this source by $2,250,000. It 
is clear that as yet the problem of war taxation had not 
been seriously attacked and that these taxes could be 
considered only as a temporary makeshift. Indeed, this 
first war budget did not include a single new tax ; it was 
simply an expansion of the existing peace budget. 

The second war budget was that of May 4, 1915. It 
was evident by this time that the war was not to end 
as speedily as had at first been optimistically anticipated. 
War costs were mounting rapidly. The deficit for the 
fiscal year 1914-15 had been $2,039,250,000, which 
was somewhat less than anticipated because of the fact 
that the increases in taxation introduced by Lloyd- 
George were yielding rather more than had been 
expected. The total expenditures for the fiscal year 

237 



WAR COSTS AND THEIR FINANCING 

1915-16 were estimated at $5,663,270,000, whereas the 
revenue receipts were calculated at $1,351,660,000, leav- 
ing a deficit of $4,311,610,000 to be met by loans. 
Evidently it was still thought that the war would be of 
short duration, for no new taxes were proposed, and the 
only additions to existing taxation were slight increases 
in the wine and beer duties. The additions made in the 
previous November were continued. 

A vigorous tax policy on the part of the British Gov- 
ernment was first introduced by the third war budget 
of September 21, 1915, when an energetic effort was 
made to open up new sources of tax revenue. The need 
of additional revenues was clearly shown by the revised 
estimates of war expenditures, which were now raised 
to $7,950,000,000 from the April estimate of $3,663,000,- 
000. To raise this enormous sum real war taxation 
would have to be resorted to. The most important 
source of revenue under the scheme proposed by the new 
Chancellor of the Exchequer, Reginald McKenna, was 
the income and supertax, in which the normal income- 
tax rate was raised to 2s. 6d. in the pound, or to 17.5 
per cent. Even more important than the increase in the 
rate was the reduction of the minimum exemption from 
$800 to $650, so that a great number of taxpayers who 
had previously escaped direct taxation were now made 
to contribute. At the same time a distinction was made 
between earned and unearned income, the latter being 
somewhat more heavily taxed. The supertax ranged 
from lOd. to 3s. 6d., being graduated on incomes from 
$12,500 to $500,000. From these two increases addi- 
tional revenues of $67,120,000 were estimated, which, 
together with the sum already collected from this source, 
would give total income and supertaxes of $582,120,000 
for the fiscal year 1915-16. 

238 



TAXATION IN EUROPE 

The real war tax of this scheme was the excess-profits 
tax, which was now introduced for the first time. This 
was a tax of 50 per cent, on the amount by which the 
profits for the accounting period '' exceeded by more 
than $1,000 the defined pre-war standard of profits." 
The standard was the average profit during any two 
of the three years preceding 1914. If no pre-war stand- 
ard were possible to define, seven per cent, of the 
capital employed was taken as the basis in the case of 
individuals and six per cent, in the case of corporations. 
The accounting period named under this Act was that 
of August 4, 1914, to July 1, 1915, the intention being 
to tax profits during later periods by subsequent 
legislation.^ 

Although the income tax now reached down to the 
man with an income of $651 or over, it was felt that 
even those with still smaller incomes must be made to 
contribute their share of taxation. But as it w^as mani- 
festly impossible to reach such persons directly through 
the medium of the income tax, it was planned to exact 
contribution from them by increasing the indirect taxes. 
The customs and excise duties were accordingly raised 
on a number of articles which were generally consumed 
by the masses of the people, such as tea, coffee, cocoa, 
chicory, dry fruit, and tobacco, on all of which the 
duties were raised by 50 per cent. ; sugar, the duties on 
which were more than quadrupled, from Is. lOd. to 9s. 
4d. per hundredweight, at which point they averaged 
3% cents per pound; motor spirits and patent medi- 
cines, upon which the duties were doubled; and cinema 
films, watches, musical instruments, imported motor cars 
and motor bicycles, hitherto untaxed, were now burdened 
with an import duty of SSV^ per cent. Finally, the 

'Economist, November 27, 1915, p. 85. 

239 



WAR COSTS AND THEIR FINANCING 

postal, telegraph, and teleplione rates were raised. From 
these new sources it was hoped to secure an additional 
revenue of $57,500,000. 

These tax proposals were severely criticized at the 
time on the ground that they did not tax nonessentials 
and luxuries more heavily in order to penalize extrava- 
gance and waste and possibly to stimulate saving. 
Although the w^ar brought hardship and suffering to 
Great Britain, it also brought prosperity to certain ele- 
ments of the population. Those engaged in the produc- 
tion of munitions, whether as contractors or workers, 
reaped an unexpectedly bountiful reward, and the same 
was true of other branches of industry. As a result of 
the sudden rise in wages, in many cases to unbelievable 
heights, there was an outburst of extravagance and 
display which seemed a strange accompaniment to war 
and called, in the opinion of many, for repressive taxa- 
tion. The situation was pictured as follows at the 
beginning of 1916:^ 

The theatres are thronged; the picture palaces are packed. 
The country roads are covered with a procession of joy- 
riding motor-cars, often in charge of a chauffeur assisted by 
a footman. Many of the shops have had such a Christmas 
season as never before, and lurid stories are afloat of the 
diamond rings, furs, and pianos with which the workers are 
making the most of the first chance they have had of spend- 
ing a surplus above the necessaries of life. Some few are 
economizing drastically, but they are nearly all folk whose 
income has been lessened or remained stationary. 

In spite of repeated demands for a tax policy that 
should penalize such waste, the Government contented 
itself with raising the duties on spirits and beer and 
imposing taxes on a few articles of general consumption 

'Daily Chronicle (London), January 8, 1916. 

240 



TAXATION IN EUROPE 

and on a short list of luxuries. It was probably 
restrained from proceeding further along these lines by 
the fear of political consequences. The result was a 
concentration on three or four sources of revenue, mostly 
direct. 

The receipts from taxation for the fiscal year 1915-16 
proved to be more than Mr. McKenna had estimated in 
September, and the expenditures were somewhat less. 
The actual expenditures were $7,795,790,000, and the 
revenue receipts were $1,683,834,120. Although this 
was a satisfactory showing from one standpoint, the 
percentage which revenue represented of total expenses, 

21.5 per cent., was much lower than was demanded by 
British public opinion. Taxes alone contributed only 

18.6 per cent. On the other hand, war expenditures 
were steadily mounting, averaging about $25,000,000 
a day for the last quarter of the fiscal year 1916. The 
interest and sinking fund charges, moreover, now con- 
stituted a heavy charge on the civil budget, amounting 
to $325,000,000 for the year. It was clear that a resort 
to still more vigorous taxation would have to be- made. 
Accordingly, when Mr. McKenna brought in the fourth 
war budget on April 4, 1916, making provision for the 
fiscal year 1916-17, he proposed to increase the tax 
revenues to $2,511,375,000. In order to raise this 
enormous sum, he preferred to increase the yield of a 
comparatively small number of taxes rather than to 
impose a multiplicity of new duties. In this connection 
he said: '' There is a limit in practice to the number 
of new taxes which may be imposed at any one time, and 
at this moment when the need is so great, revenue must 
be my first object. Innumerable small taxes which 
bring in little revenue, cause much inconvenience, and 
are costly to collect and of little use for my purpose/^ 

241 



WAR COSTS AND THEIR FINANCING 

The budget which Mr. McKenna presented at this 
time may fairly be regarded as the first one which 
grappled earnestly with the problem of meeting a con- 
siderable share of the war costs out of taxation, and it 
was really the only effective war budget. To secure the 
additional revenue the income tax w^as first of all raised. 
Where the total income did not exceed $2,500, the rate 
was fixed at 2s. 4d., and it progressed from this point 
to 5s. on incomes above $12,500; in other words, the 
rates ranged from 11^/4 per cent, to 25 per cent. These 
were the rates on earned incomes. On unearned incomes 
they were higher, progressing from 3s. on incomes not 
exceeding $2,500 to 5s. on incomes over $10,000, which 
figure out at 15 per cent, to 25 per cent. The supertax 
was this time left unchanged. The rate of the excess- 
profits tax, which had met with popular approval, was 
raised to 60 per cent. From these three items the 
Chancellor hoped to secure $963,675,000. 

Attention was then given to customs and excise duties. 
The duty on cocoa was quadrupled; that on coffee and 
chicory was doubled; that on sugar was raised 50 per 
cent. New taxes were imposed on table waters, cider, 
and similar beverages and on matches, and license fees 
for automobiles and motorcycles were doubled. Amuse- 
ments of all sorts were also to be taxed, including 
these sources it was hoped by the Chancellor to raise 
$309,900,000. 

The essential feature of this budget was the recognition 
of a considerable war prosperity, a part of which was 
to be diverted into the Treasury. As this war prosperity 
was temporary and was made at the expense of the 
nation, it was an eminently fitting object of taxation. 
So far as it appeared in the form of profits, it was 

242 



TAXATION IN EUROPE 

levied upon by the war-profits tax ; so far as it appeared 
in the form of higher wages, it was best reached by 
indirect taxes on articles of general consumption. The 
greater part of the burden still fell upon the direct tax- 
payer, although heavier levies on the wage earners were 
also imposed. 

The budget for the fiscal year 1917-18 was not pre- 
sented until May 2, 1917, by Andrew Bonar Law, the 
new Chancellor of the Exchequer. His policy was more 
distinctly a loan policy, making but slight changes in 
the existing taxes and relying mainly upon loans to 
finance the war. Expenditures for the coming year 
were estimated at $11,451,905,000. The total revenue 
was~ estimated at $3,183,000,000, an increase over the 
preceding year of $325,860,000. Few changes were 
made in existing taxes, the net increase from this source 
being calculated at only $130,500,000. Indeed, the 
small addition to taxation was the most striking feature 
of the budget, and one which called forth adverse criti- 
cism. Thus, the London Economist, always a staunch 
advocate of vigorous taxation, commented on the budget 
as follows : "In the face of extravagance and inflation 
the only cure was surely taxation or compulsory borrow- 
ing, which alone could have taken out of the hands of 
thoughtless and ignorant people the power to draw the 
economic energy of the country from the war work 
upon which it should be concentrated. ' ' The new taxes 
proposed, or rather the extension of old taxes, were 
the following: an extra Is. lOd. per pound on tobacco, 
which was expected to bring in $30,000,000; an increase 
in the entertainments tax on tickets costing more than 
2d., $5,000,000; an increase in the rate of the excess- 
profits tax to a maximum of 80 per cent., the munitions 
tax now being consolidated with it, $100,000,000. On 

243 



WAR COSTS AND THEIR FINANCING 

the other hand, further rebates were made on liquor- 
license duties which reduced the yield from this source 
by $4,500,000. 

In the budget for 1918-19 the revenues were estimated 
by Bonar Law at $4/210,250,000, of which $339,000,000 
was to be obtained from new taxation. The income tax 
was increased from 5s. to 6s. in the pound on incomes 
over $2,500, and the supertax was raised from Is. to 4s. 
6d. in the pound. From these two increases a yield of 
$114,750,000, or just one-third of the new taxation, was 
anticipated. Another third was estimated from in- 
creased customs duties, the chief of which were a rise in 
the tobacco tax of Is. 2d. per pound, and of that on 
sugar from lis. 8d. to 25s. 8d. per hundredweight. A 
doubling of the tax on spirits, beer and matches was 
expected to yield $89,250,000 additional; the balance to 
be obtained from an increase in the stamp duties on 
cheques and an increase in postal rates. From these 
lestimates ^t is seen that increasing resort was being had 
to indirect taxes, as the limit of endurance seemed to 
have been reached in direct taxation. 

A luxur}^ tax was also voted, which was to be levied 
at the rate of 2d. in the shilling and collected by means 
of a stamp duty. It was referred to a committee for the 
purpose of working out the details and was not reported 
out by them until August. As it was to continue only 
until the end of the fiscal year and at that time was 
not renewed, the returns from this source were but 
slight. For purposes of this tax articles were divided 
into two groups : In the first were included articles the 
character of which as luxuries was not open to question 
and which were taxed irrespective of their price; in 
the second group the tax was imposed only if the price 
of the article was above certain specified minima. 

244 



TAXATION IN EUROPE 

The revenue receipts of Great Britain for the six fiscal 
years 1914 to 1919 are shown in the following table : 

Revenue of Great Britain, Fiscal Years 1914 to 1919 

1014 $991,214,250 

1915 1,133,470,000 

1916 1,683,835,000 

1917 2,867,140,000 

1918 3,536,175,000 

1919 4,445,105,000 

Expenditures in France before the war had already 
reached a point where it was difficult to provide by 
taxation the funds necessary to cover her ordinary civil 
expenditures and the interest on her enormous indebted- 
ness. Indeed, in the very year in which the war began 
France was obliged to issue an additional loan to cover 
the peace expenditures. When the German invasion 
of northern France tore from her 10 of her richest 
departments and the mobilization of her men denuded 
industry and agriculture of their best workers, it seemed 
out of the question to impose new taxes or to raise the 
rates of existing taxes. The burden of the war itself 
constituted a crushing tax upon France. For the last 
five months of the year 1914 the yield from existing 
taxes fell off 38.6 per cent, from the same period in the 
preceding year. During the next year, 1915, there was 
a further slight decline of $24,400,000 below the tax 
receipts of 1914, but if the last five months of 1915 be 
compared with the same period in 1914, an encouraging 
improvement can be noted, as there was a gain of 
$74,400,000. The taxes, however, were still far below 
normal. Notwithstanding the disabilities under which 
France was laboring in the matter of taxation, any resort 
to heavier burdens was deprecated on the ground that 
the war would be of short duration. It was urged not 

245 



WAR COSTS AND THEIR FINANCING 

only that no taxes be levied, but that not even a definite 
loan be issued, as the war could easily be financed from 
the Bank of France and by the issue of Treasury bills.* 

By the end of 1915 it had become obvious that a 
speedy termination of the war was not to be hoped for, 
and that new taxes would have to be levied in order at 
least to meet the growing interest charges on the new 
loans. Existing receipts were now not even meeting the 
civil expenditures and the debt service. The latter 
charges amounted to $380,000,000 for 1915 and $653,- 
100,000 for 1916. Accordingly, the year 1916 saw for 
the first time the imposition of new taxes and the 
txpansion of old ones. The important new taxes were 
the income tax and the war profits tax. The income 
tax was not a war tax, strictly speaking, for it had been 
decreed by the law of July 15, 1914, under which it 
was to go into effect on January 1, 1915. But the out- 
break of the war and the disorganization of all business 
led the Assembly by act of December 26, 1914, to defer 
the inauguration of the tax to January 1, 1916. 

The French income tax was imposed upon all persons 
having a net income of $1,000 or over. There were 
various deductions and abatements: An allowance of 
$400 was made to a married man and an additional $200 
for each dependent child up to five in number; beyond 
that number there was a deduction of $300 for each 
child. A limited progression was introduced into the 
tax by a rather complicated method. The tax was calcu- 
lated by counting at one-fifth the income between $l-,000 
and $2,000 ; at two-fifths that between $2,000 and $3,000 ; 
at three-fifths that between $3,000 and $4,000; and at 
four-fifths that between $4,000 and $5,000: all over 

* UEconomiste Francais, December 26, 1914; January 30, 1915, 
p. 132. 

246 



TAXATION IN EUROPE 

$5,000 was to be counted at its full value. The rate of 
the tax was two per cent. Although it was estimated 
that this tax would yield revenues of about $12,000,000 
to $16,000,000, the actual yield for the first year of its 
imposition (1916) amounted only to $4,500,000. The 
liberal exemptions granted, the low rate of the tax, a 
certain amount of evasion, and the hardships of the 
French people all helped to produce this low yield. 

A more characteristic tax of this period was the war 
excess profits tax, which was imposed upon exceptional 
and additional war profits made during the war. As 
adopted on July 1, 1916, the law taxed profits made dur- 
ing the war and was to continue for 12 months after the 
cessation of hostilities. The average net profits for the 
three years prior to August 1, 1914, were taken as the 
normal base for determining war profits, and upon the 
excess a tax of 50 per cent, was levied. The rate of 
taxation was increased after September 30, 1916, to 60 
per cent, of the taxable profits over $100,000. Amounts 
of $1,000 or under were exempt. 

Other taxes were imposed by act of July 1, 1916, as 
follows: (1) an exceptional war tax on all Frenchmen 
within the military age limit who for one reason or 
another were not called to the colors; (2) certain 
so-called '' grouped " taxes were doubled, such as those 
on mines, carriages, horses, clubs, billiard tables, etc.; 
(3) the existing tax on securities was raised by one per 
cent.; (4) special taxes were imposed on certain colonial 
products, such as tea, coffee, cocoa, chocolate, tobacco, 
etc., in addition to the existing customs duties; (5) a 
number of other miscellaneous taxes were imposed, such 
as those on theatres, alcoholic drinks, and special phar- 
maceutical products; (6) and finally, rates were raised 
on letters, telegrams, telephone calls, and money orders. 

247 



WAR COSTS AND THEIR FINANCING 

The effect of these new impositions was seen in an 
increase in the tax revenues, which were raised for the 
year 1916 almost to the point at which they had stood 
in 1913. The yield for 1916 was $933,286,500, but as 
the interest charges on the growing debt now amounted 
to $653,400,000, it was clear that additional revenues 
would have to be raised. The yield from the income 
tax, moreover, had proved distinctly disappointing, and 
the deficit from this source would have to be made good. 
In spite of vigorous opposition, the conviction gradually 
prevailed that the income tax must be made more lucra- 
tive and that other sources of revenue must be tapped. 
The end of the year 1916, accordingly, saw the intro- 
duction of additional tax measures. 

An act of December 30, 1916, imposed a number of 
additional taxes and raised in a drastic manner the rates 
of those already existing. It was hoped by means of 
these new levies to raise about $117,200,000 of new 
revenue. The greatest dependence was placed upon the 
general income tax, w^hich was now made much heavier, 
the minimum exemption being reduced from $1,000 to 
$600 and the rate progressing from one per cent, on the 
smallest amount to 10 per cent, on the excess over 
$30,000. Deductions for dependents were the same as 
under the former law. As a result of the charges and 
of the sharper control which was exercised, the yield of 
the tax, which had been estimated at $30,000,000 to 
$32,000,000, proved to be $36,600,000 for the year 1917. 

Although France was still depending principally upon 
loans to defray the cost of the war, she was nevertheless 
making an effort to increase the revenues from taxation. 
The acts of July 1 and December 30, 1916, had broad- 
ened the basis of taxation by the addition of a number 
of new taxes and by increasing the rates of old ones. 

248 



TAXATION IN EUROPE 

These taxes went into effect on January 1, 1917. The 
French mind, however, was too logical to permit the 
existing patched-up system to remain, and in conse- 
quence, the next thing to be done was to overhaul the 
old taxes not yet touched. Early in the year 1917, 
M. Ribot, the Minister of Finance, proposed that three 
antiquated and oppressive old taxes be canceled. These 
were the tax on doors and windows, the business tax 
(patentes), and the inhabited house tax. To compensate 
for this loss of revenue he proposed two new taxes, 
namely, a personal tax of $1 on each person with a 
private, income and an increase of 20 per cent, in the 
general income tax. These proposals were acted upon, 
and the law of July 31, 1917, which carried them into 
effect, marked, according to an eminent French author- 
ity, the * ' beginning of a new fiscal era. ' '^ The abolition 
of the three taxes mentioned above was carried through, 
and thus were got rid of some most unequal and 
vexatious taxes. The new taxes proposed by M. Ribot, 
however, were not accepted, but other taxes were substi- 
tuted in their place. A new annual tax was imposed 
on business profits, the rate of which was 41/2 per cent., 
but it was graduated in characteristic French fashion, 
with an exemption of $300. A special tax was also 
imposed on the turnover of retail business when that 
turnover, after certain deductions, exceeded $200,000. 
The rate was graduated from one-tenth of one per cent, 
on this sum to one-half of one per cent, on the excess 
over $400,000. Other new taxes enacted by this law 
were a tax on agricultural profits and taxes on salaries 
and the liberal professions, at a rate of 334 per cent. 
All of the above were to go into effect on January 1, 1918. 

^ Gaston J^ze, Revue de Science et de Legislation financicre, 
XV, p. 448. 

249 



WAR COSTS AND THEIR FINANCING 

During the year 1918 France continued the same 
policy of endeavoring to increase her tax revenue. The 
total estimated receipts from taxation for the year 1918 
were $1,501,961,000, or about $800,000,000 more than 
had been raised in 1913. The greatest increase had 
taken place not unnaturally in direct taxation, especially 
in the income and war profits taxes. A new tax which 
was imposed during this year was the so-called luxury 
tax, which was to go into effect on April 1, 1918. This 
was very unpopular and was correspondingly unsuc- 
cessful, at least as a revenue producer.® 

The income tax was revised again during the year 
1918. The exemption minimum was fixed at $600 as 
before, with heavy rebates to married and dependent 
persons. Between $600 and $1,000 the tax rate was 
1.5 per cent.; beyond this point it increased by one 
centime for each $20 up to $30,000; from $30,000 to 
$110,000 the tax progressed by one centime for each 
$200 ; over $110,000 the rate was fixed at 20 per cent. 

The revenue receipts of France during the war were : 

RE^'ENUE OF France, Fiscal Years 1914 to 1918 

1914 $796,821,386 

1915 776,794,297 

1916 963,286,447 

1917 1,261,200.000 

1918 1,326,800,000 

The war affected the revenue of Russia disastrously. 
The foreign trade was reduced to about 20 per cent, of 
that existing before the war, with a corresponding 
reduction of customs revenue amounting to about 
$250,000,000 annually. A still greater sacrifice of 
revenue, amounting to almost $450,000,000, or about a 

' See my article on " Luxury Taxes " in the Bulletin of the 
Xational Tax Association, June, 1919, pp. 237-239. 

250 



TAXATION IN EUROPE 

quarter of the total, was made by the abolition of the 
state spirits monopoly immediately upon the outbreak 
of the war. To compensate for these losses new taxes 
were at once proposed. These comprised a freight tax 
on all commodities transported within Russia by rail or 
water; taxes on passenger tickets and on cotton; and 
an increase in the postal and telegraph rates. These 
taxes, however, were insufficient to make up the deficit 
occasioned by the loss of the other revenue. 

Few new taxes were imposed during the year 1915. 
The rate on city realty was raised from six per cent. 
to eight per cent., and the hut tax in the Asiatic 
provinces was increased from four to eight rubles a hut. 
Taxes on apartment houses and trade guilds were 
increased 50 per cent. From these four sources a net 
revenue of $43,350,000 was expected, and a further yield 
of $47,400,000 was anticipated from the increase of a 
number of indirect taxes, such as those on tobacco, 
cigarette papers, matches, beer, wine, sugar, naphtha, 
and yeast. Finally, increased rates on a number of 
Government monopolies, such as higher port and dock 
dues, post and telegraph charges, and railway rates, 
were expected to bring in $146,500,000. The total from 
all these sources was estimated at $250,000,000. By the 
end of the year, however, the Finance Minister was com- 
pelled to announce that the actual receipts had fallen 
short of the estimate by some $168,000,000. To make 
up this deficit Government monopolies of tea, sugar, 
matches, coffee, and wine were proposed, which it was 
estimated would bring in about $150,000,000 a year. 

The year 1916 was marked by the introduction into 
Russia of two noteworthy taxes. The first of these, the 
war profits tax, was a real war tax. By a decree of 
May 16, 1916, a temporary tax for 1916 and 1917 was 

251 



WAR COSTS AND THEIR FINANCING 

imposed on the excess profits of commercial and indus- 
trial undertakings and personal industrial earnings. 
Profits of less than eight per cent, of the authorized 
capital were exempt from the tax on excess profits. 
Those above this rate were subject to a progi-essive tax 
which ranged from 20 per cent, to 40 per cent. The 
earnings from personal industrial vocations were taxed 
at the rate of 20 per cent, on all profits above $250. 
The second tax, the introduction of which into Russia 
was made possible by the war though it was not so dis- 
tinctly a war tax, was the income tax. This was made 
law in October, 1916, but was not to come into operation 
until January 1, 1917. The tax was graduated on all 
incomes over $425 a year, beginning with one per cent, 
on that amount and increasing to 12.5 per cent, on 
incomes of $200,000 or over. It was estimated that the 
income tax would yield $20,000,000 per annum. These 
two taxes affected only the well-to-do and the industrial 
classes. If the revenues from taxation were to be 
increased largely, it would be necessary to reach the 
incomes of those in the exempt classes, that is, the 
peasants in general. Previously they had been reached 
by means of the vodka monopoly, and now plans were 
suggested for an increase in the tax on sugar, the con- 
sumption of which had increased greatly. 

The taxes just described, which were to have gone 
into effect in 1917, were never really enforced because 
of the outbreak of the revolution in March of that year. 
The war profits tax met with serious opposition from 
business circles, which claimed that because of the 
increases in the prices of raw material and labor such a 
tax, if enforced, would destroy industry. It was pro- 
posed, therefore, to defer the levy of this tax until the 
following year and to provide for its payment in install- 

252 



TAXATION IN EUROPE 

ments. In this exigency an emergency income tax was 
levied in June, 1917, which was to apply only to the 
year 1917. This was levied on all persons and corpora- 
tions liable in that year to the ordinary income tax if 
the taxable income assessed were over $5,000. Owing to 
the disturbed political situation and the uncertain 
powers of the Provisional Grovernment little could be 
done to enforce existing legislation. In the circum- 
stances, therefore, little could he expected from these 
taxes, and as conditions became more and more unsettled, 
the revenues from all sources showed a steady decline. 

After the November, 1917, revolution there was no 
further talk of taxation. In lieu of this the Bolsheviki 
raised the necessary revenues by conscription and by 
the nationalization of industry. If this were done uni- 
versally, there would be, of course, no place left for a 
system of taxation. The Bolsheviki seem, however, to 
have maintained the Government monopolies. Because 
of the decentralization of government and of administra- 
tion the national system of taxation broke into fragments 
which were taken over by the local communes. The 
Commissariat of Finance on November 7, 1918, admitted 
that $15,000,000,000 in credit notes had been issued 
since January 1. The note issues, which stood at 
$8,458,500,000 on October 25, 1917, when the Kerensky 
regime came to an end, had risen by June, 1919, to an 
amount variously estimated at $35,000,000,000 to 
$50,000,000,000. New notes were being printed at the 
rate of about $2,500,000,000 a month, with the avowed 
purpose, according to a statement attributed to Lenin, 
of destrying the value, of all money by making it 
worthless. Five hundred and thirteen undertakings 
were nationalized, checking production and also profits 
in the non-nationalized undertakings. As State owner- 

253 



WAR COSTS AND THEIR FINANCING 

ship resulted only in loss, the revenues were badly hit. 
The tax on industries fell from $62,900,000 in the first 
half of 1917 to $18,310,000 in the same period in 1918. 
The budget estimates called for an expenditure in 
nationalizing industry of $1,000,000,000 for the first half 
of 1918 and $400,000,000 for the second half. The 
budget estimated total expenditures from January to 
June of 1918 at $7,116,000,000, and from July to 
December, 1918, at $837,152,000. The rerenue side of 
the ' ' budget ' ' showed receipts from State undertakings 
of $406,511,000, practically all of which came from the 
nationalized chemical and metallurgical industries; 
receipts were therefore less than half the expenditures 
on State undertakings. Outside of these two industries 
the manufacture and sale of tobacco was apparently 
the only flourishing activity, receipts from this source 
for the first half of 1918 being 76 per cent, higher than 
in the preceding year, and those from cigarettes and 
cigarette holders being 287 j^jer cent, higher. The budget 
of the Supreme Council for 1919 placed expenditures 
at $5,488,000,000 and revenues at $2,937,165,000.^ 

The revenues of Russia during the four years 1914 to 
1917 were as follows : 

Revenues of Russia, Fiscal Years 19U to 1917 

1914 $1,449,000,000 

1915 1.397.000.000 

1916 1.457.000.000 

1917 1,870,000,000 

Italy's record in the matter of taxation is an honor- 
able one. Burdened though she was by enormous 
expenditures for armament. Italy had seemingly de- 

^ These facts are gathered from the Russian correspondence of 
the Economist. See especiallr Janiiarv 4, 1919, p. 4; !March 1, 
p. 367; May 3, p. 718; June 28, p. 1175. 

254 



TAXATION IN EUROPE 

veloped her taxes before lier entry into the war to the 
limit of the ability of her people to bear. After her 
entry, with the growth of the attendant expenditures, 
the need of additional revenues began to be insistent. 
Almost from the beginning provision was made for the 
enlargement of old taxes and the imposition of new ones. 
By royal decree in October, 1914, a general program 
of taxation had been outlined, which was later put into 
effect under various legislative decrees. The actual 
entry of Italy into the war in May, 1915, disrupted 
industry and trade, and the consequent shift to war 
production made the taxation yield of 1915-16 fall off 
from the 1914-15 yield ; but the decrease was principally 
in the state monopolies, customs, and land taxes, and as 
a result of measures enacted to protect the property 
rights of the vast body of men called to the colors. 
The taxation program outlined in December, 1915, 
increased the price of all commodities of which the State 
had monopolies; postal, telephone, and telegraph rates 
were raised, and at the same time new Government 
monopolies were created and new taxes introduced. 
These latter fell under two heads, (1) levies that were 
expected to become permanent and (2) those of a pro- 
visional character. In the first group were included 
income and business taxes, increase in the postal rates, 
increased taxes on superfluous commodities such as 
tobacco, spirits, beer, and petroleum, and new taxes on 
necessaries such as salt, matches, sugar, and bicycles. 
From all of these taxes the estimated yield was 
$61,400,000. In the second group, that is the pro- 
visional taxes, were included the war-profits tax and 
one or two minor imposts from which it was hoped to 
obtain $19,000,000, or a grand total of $80,400,000. As 
a result of these new taxes, which only came into full 

255 



WAR COSTS AND THEIR FINANCING 

operation during tlie yeav 1916-17, the total revenues 
were raised by $52,000,000 over the 1915-16 yield. 

The character and variety of the new taxes illustrate 
strikingly the difficulty with which Italy was raising 
these additional sums. Unhappily the costs of the war 
were growing so rapidly and the amount of her loans 
had swelled to such proportions, that the increased 
receipts, secured Avith such labor, were insufficient to 
meet even the growing civil expenditure and interest on 
the war debt. For the fiscal year 1915-16 the interest 
charges amounted to $151,000,000 and total revenues 
fell off $30,611,000 from the la^t peace year (1914), 
though the actual increase in taxation from new imposi- 
tions amounted to $75,000,000. 

By decree of November 15, 1916, further, taxes 
were imposed which were expected to bring in some 
$10,000,000 annually. Under this decree a large 
number of taxes was levied which affected almost every 
commodity and business transaction. The variety and 
detailed nature of the taxes was characteristic, for in 
Italy, as in France, the Government seemed to prefer 
to depend upon a large number of small taxes than to 
concentrate on a few large ones. The tax on war profits 
was first of all considerably increased and was continued 
until the middle of 1918. The tax was levied on profits 
over eight per cent., and the rate progressed from 20 
per cent, on the lowest amount to 60 per cent, on profits 
that exceeded 20 per cent, on the invested capital. 
Other taxes were imposed on men of military age who 
were not called to the colors and on proprietary medi- 
cines and fancy toilet articles; stamp taxes were also 
levied on bills of exchange and certain other commercial 
paper, and the prices of various classes of stamped paper 
for legal documents were raised. Limited-liability 

256 



TAXATION IN EUROPE 

companies, motorcycles, motor cars, motor boats, and 
house rent were also subjected to special levies. A 
monopoly was established on playing cards, and finally 
rates were raised on telegrams and certain postal serv- 
ices. The total revenues for 1916-17 were $653,000,000. 
If to this sum there be added the profits from public- 
service utilities of about $120,000,000, the grand total 
would be $773,000,000. Since much of the new taxation, 
especially that on war profits, did not become effective 
until January 1, I9l7, the revenues of this fiscal year, 
large as they were, did not after all represent the full 
potentialities of the new tax system. 

The revenues for the next fiscal year, ending June 30, 
1918, were $929,000,000, which was about $168,000,000 
above the preceding year. The income and business 
taxes contributed about one-third of this total, or 
$292,460,000; the war-profits tax yielded $80,560,000, 
which wa^ more than had been anticipated. On the 
other hand, the newly imposed taxes on motion pictures, 
jewelry, perfumes, etc., showed only meagre results, 
quite incommensurate with, the irritation they caused. 
Large gains were made in customs revenues, owing in 
part to the increased importation of munitions and 
foodstuffs on Government orders. The greatest gain 
was made from state monopolies, which yielded a total 
of $223,800,000, the greater part of this, some $184,600,- 
000, being derived from tobacco; but as a considerable 
part of this was purchased by the army, the profits 
were as illusory as the gains from increased customs 
duties. Still, even after making all allowance for these 
factors, the increase in revenue was real and impressive. 

In spite of all efforts to increase revenue receipts, the 
growing costs of the war contrived always to mount more 
rapidly. If the additional expenditures for interest on 

257 



WAR COSTS AND TIIEIH FINANCING 

the debt, for pensions, and similar items were to be met 
out of revenues rather than loans, it would be necessary 
to exact even larger sums from the people. Accordingly 
in the year 1917-18 the sale and supply of the following 
articles were declared to be State monopolies: coffee 
and its substitutes, lubricants, distilled spirits, coal pro- 
duced in Italy, explosives, electric-light bulbs, mining 
of mercury, tea, sugar, petroleum, paraffin, mineral 
oils, and quinine. The extension of State monopolies 
was very unpopular and aroused bitter opposition on 
the part of business interests, but on account of their 
productivity the policy was persevered in by the Gov- 
ernment. The dictates of necessity were too grave to 
permit of any compromise. A few additional taxes were 
also added to the already long list, the most important 
of which was the supplementary income tax for the 
fiscal year 1919 only, in addition to the existing tax on 
incomes. This began with one per cent, on incomes of 
$2,000 and ran up to eight" per cent, on those over $15,000. 
Italy's revenues during the war are shown in the 
following table : 



Revenues of Italy, Fiscal Yeabs 1915 to 1919 

1914-15 $609,340,000 

1915-16 601.405,000 

1916-17 761.000.000 

1917-18 929.000.000 

1918-19 971,000.000 



According to the German theory of financing the war, 
new taxes were not to be imposed except in the event of 
a deficit. At the end of the fiscal year 1915 (March 31) 
a surplus of $43,800,000 was announced by Dr. 
Helfferich, the Minister of Finance. This showing, 
which on the face of it apparently evidenced great 

258 



TAXATION IN EUROPE 

financial strength, was secured by transferring the 
whole of the military and naval outlay from the 
ordinary civil budget to the extraordinary war budget. 
As the item thus transferred amounted in the fiscal year 
1913-14 to about $344,425,000, it will be seen that the 
so-called surplus was only nominal and that there was 
a real deficit of $289,675,000. Moreover, it may be 
pointed out that although the Imperial Government had 
not yet resorted to taxation to meet the extraordinary 
cost of the war, heavier taxation was already being 
imposed by the local governments and by the separate 
states. In explanation of this program, if not in its 
defense, it may be said that owing to the fact that the 
revenues of the Imperial Government were indirect and 
that the customs duties had fallen off very largely, the 
Imperial Government found it very difficult to enlarge 
its tax revenues. The direct taxes of the states, which 
could more readily be adjusted to changing needs, were 
already very generally being raised. 

In his budget speech of March 16, 1916, Dr. 
Helfferich for the first time urged the imposition of 
new Imperial taxes. These were very slight, however, 
and were designed to do no more than meet the interest 
charges on the war debt. He proposed a war-profits 
tax, the increase of existing taxes on tobacco, cigarettes, 
bills of lading, and receipts, and additions to existing 
postal, telephone, and telegraph rates. The yield from 
these taxes was estimated at $125,000,000, but the actual 
receipts were kept a secret as was every vital fact 
connected with German war finance. As finally passed 
by the Reichstag, the tax measures differed in several 
respects from those proposed by Dr. Helfferich. The 
proposals for a universal receipts tax was rejected, and 
a tax on the yearly sales of goods was substituted 

259 



/ 



WAR COSTS AND THEIR FINANCING 

therefor. Sales of less than $750 were exempt; above 
that sum the rate was fixed at one dollar per thousand. 
The tax was to go into effect on October 1, 1916. The 
other proposals were accepted with only minor modifica- 
tions. As a result of these changes the estimated yield 
was raised from $125,000,000 to $145,000,000. 

By the end of another year the enormous increase in 
the public debt had so increased the charges for interest 
that additional revenues were imperative if this charge 
were to be met out of revenue. Wlien the Reichstag 
met on February 22, 1917, one of the first duties laid 
before it was that of voting new taxes. The Government 
proposed a 20 per cent, increase in the war profits tax, 
a tax on the Reichsbank, and new taxes on coal and on 
railway travel. The total yield of these new taxes was 
estimated at $312,500,000, of which the coal tax was 
estimated to furnish $125,000,000 and the railway- 
traffic tax $78,500,000, the rest being from the addition 
to the war profits tax and the tax on the Reichsbank. 
Both the coal and the railway traffic tax were very 
unpopular, as they raised the cost of heating and light- 
ing and travel by about 10 per cent. Although this 
addition to tax revenue marked a considerable increase 
over the preceding year, it was yet insufficient to meet 
the growing civil expenditures. If Germany were to 
avoid continued deficits and the payment of interest on 
her war debt out of new loans, a policy which until 
now she had followed, still heavier taxation would be 
needed. This, however, was becoming increasingly diffi- 
cult to secure. The people were already war-wearj^, 
and the Government hesitated to impose new burdens 
in addition to those which the war itself had brought. 

By 1918 the financial situation had reached such a 
desperate pass that there could no longer be any tempo- 

260 



TAXATION IN EUROPE 

rizing. Accordingly, the Government introduced far 
more extreme proposals for taxation in its 1918-19 
budget than it had yet ventured to suggest. No fewer 
than 11 new revenue measures were proposed, which 
it was estimated would yield additional revenues of 
$718,750,000. Taxes were proposed on practically all 
beverages; they were applied also to exchange and to 
certain business transactions. A belated luxury tax was 
introduced, and the rate of the war profits tax was again 
raised, as were also the postal rates. This enumeration 
shows the difficulty with which the Imperial Government 
was confronted by reason of its restriction to indirect 
taxation. The heavy inheritance and income taxes of 
England and the United States were wholly lacking, as 
these belonged in Germany to the separate states. The 
war profits tax too, brought in less than it should have, 
owing to the peculiar method of levy. 

The estimated budget revenues for new taxation are: 



1916-17 $120,000,000 

1917-18 312,500,000 

1918-19 718,750.000 

Total $1,151,250,000 



The only utterance on the actual returns from taxa- 
tion was the cryptic statement of Count von Roedern in 
the Reichstag in March, 1918,^ when he declared that 
more had been raised by taxation in Germany than was 
generally supposed. He said that about $2,000,000,000 
had been raised, as follows : War profits tax and Reichs- 
bank tax, $1,250,000,000; increases in municipal direct 
taxes for war relief, $500,000,000; and $250,000,000 
from the special defense levy of 1913. No liVht was 

' Reported in the Economist, March 9, 1918, p. 425. 

261 



WAR COSTS AND THEIR FINANCING 

thrown upon the question as to how far this actual yield 
had been offset by deficits in normal revenues, the 
budgeted new taxation being superimposed on the 
normal peace budget of 1913-14, in which customs alone 
had yielded $17,000,000, practically all of which must 
have been lost as a result of the blockade. On the other 
hand, if the municipalities met out of taxation the 
$1,124,000,000 expended by them on separation allow- 
ances and relief to families of mobilized men, which 
Dr. Schiffer announced was an Imperial debt to them, 
Germany must fairly be credited with having raised 
revenues to meet war expenditures to the extent of that 
amount, even though this was actually done by the 
the muncipalities instead of by the Imperial Government. 
The estimated revenues of Germany for the fiscal 
years 1915 to 1919 were as follows : 

Ee^-exues of Germany, Fiscal Years 1915 to 1919 

1915 $851,294,600 

1916 829,270,125 

1917 970,729.732 

1918 1,116,134,367 

1919 1,533,824,194 

The revenue receipts of Austria showed a considerable 
fall during the first two years of war, but after that 
they began to increase. Never, however, were they 
sufficient to meet the necessities of the civil budget and 
of the growing debt service occasioned by the war. The 
Government made a fairly determined but unsuccessful 
effort to secure additional revenue from taxation. In 
1915 the rates of court fees and duties on inheritances 
were raised by royal decree, but as these new rates were 
not to come into effect until January 1, 1916, the revenues 
for the year 1915 were not affected. During the y^ear 

262 



TAXATION IN EUROPE 

1916 many increases in existing taxes were introduced. 
The main source of direct taxation in Austria had long 
been a personal tax law, which had been amended in 
the spring of 1914 so as to increase the scale of the 
income taxes and introduce a surtax on directors' fees. 
In spite of the Russian occupation of part of the 
Empire, the yield for 1914 was only slightly less than 
that of the preceding year, when it amounted to 
$86,300,200. In 1915 it actually increased to $87,456,- 
400. In 1916 the rates were considerably increased, in 
some cases to double the previous ones. It is impossible 
to state the yield from the various increases, but if they 
were commensurate with the increase in the rates, there 
should have resulted a substantial augmentation of the 
revenues of the Empire. Nothing seems to have been 
done during the year 1917 in the way of introducing 
new taxes or raising the rates of existing ones. Popular 
discontent was now so great that the Government feared 
to impose new burdens. In spite of the growing needs 
of the Treasury, a proposal to introduce an Imperial 
income tax was rejected in 1918. The yield from the 
other taxes, although increasing in nominal amount, 
really represented a greatly decreased purchasing power 
in view of the depreciation of the currency. The follow- 
ing table shows the Imperial revenues during the war : 

Reventtes of Austria and Hungary, 1915 to 1918^ 

Austria Hungary 

1915 $692,145,200 $452,831,400 

1916 • 641,847,600 401.000,000 

1917 777,528,600 536.000,000 

1918 971,000,000 893,780,000 

®The budgets for Hungary in 1916 and 1917 were not pub- 
lished, and these figures are estimated according to the propor- 
tionate decrease or increase in the Austrian budgets. All other 
figures are budget estimates, and probably only faintly cor- 
respond with the real facts. 

263 



CHAPTER IX 

TAXATION IN THE UNITED STATES 

A new era of Federal taxation — Revenue Act of October 3, 1913 

— Outbreak of the European War — Emergency Revenue Act 
of October 22, 1914 — Act of September 8, 1916 — The taxa- 
tion of wealth — Act of March 3. 1917 — Declaration of war 
by the United States — War Revenue Act of October 3, 1917 

— Income and excess profits tax provisions — Act of Febru- 
ary 24, 1919 — Analysis of the measure. 

The year 1913 ushered in a new era of Federal taxa- 
tion in the United States. Prior to that date the chief 
sources of revenue had been the customs duties, taxes 
on distilled spirits and tobacco, and since 1909 an excise 
on corporate incomes. The total yield for 1913, includ- 
ing postal revenues, was slightly over $1,000,000,000, 
around which figure it had fluctuated for several years. 
In 1913, however, the tariff was revised and greatly 
lowered on raw materials necessary to the American 
manufacturer. As the lowered tariff directly affected 
the Treasury receipts, it was necessary to make good 
the loss in revenue, and for this purpose the income tax 
was introduced as a part of the Underwood-Simmons 
Kevenue Act of October 3, 1913. This had been made 
possible by the promulgation on February 25, 1913, of 
the Sixteenth Amendment to the Federal Constitution. 

Although the main purpose in the imposition of the 
income tax was to make good the loss in revenue 
involved in the reform of the tariff, just as the 
British income tax had been an integral part of 
Peel's tax reform in 1842, yet another very definite 

264 



TAXATION IN THE UNITED STATES 

purpose in the passage of this Act was the imposi- 
tion of heavier burdens of taxation upon the pos- 
sessors of large wealth.^ Mr. Underwood, Chairman 
of the House Committee on Ways and Means, in reply 
to a taunt that the income tax was added because other- 
wise sufficient revenues could not be raised by his tariff 
measure, answered that the Republicans were blind to 
the trend of the times; that the Democrats did not 
propose to pass the bill because they were compelled to, 
but because " the time has come in this country when 
the great untaxed wealth of America must and shall 
bear its fair share of running the Government of the 
United States. . . . We remove the taxes at the 
customs house on necessaries purposely to levy a tax 
on wealth. I wish my friends on the other side clearly to 
understand this."^ Cordell Hull of Tennessee, who was 
the real author of the income tax section of the Act, was 
even more explicit, and asserted that the income tax 
was intended to shift the burden to those who are best 
able to pay.^ Similarly, Senator Simmons of North 
Carolina, Chairman of the Senate Finance Committee, 
stated that ' ' the income section is not framed to supply 
a deficit in revenue, but, on the contrary, is based on 
the theory that property should bear its just share of 
the Federal as well as state taxation, and therefore the 
rate of this tax should be fixed with a view to requiring 
the wealth of the country as reflected in the income 
of the well-to-do to contribute equitably to these 
expenses."* From John Sharp Williams of Mississippi 

* See my article, "The Taxation of Wealth," in the Bankers* 
Magazine (New York), August, 1917, from which the following 
citations are quoted. 

^ Congressional Record, 1, Part III, p. 332. 

^Ilid., p. 505. 

*Ihid., p. 2553. 

265 



WAR COSTS AND THEIR FINANCING 

came perhaps the frankest statement of purpose. ' * This 
bill," he said, " marked the inauguration of a new 
philosophy of taxation, and as it is perfected, the taxes 
upon consumption will dwindle more and more, and the 
income tax will more and more take their place. ' ' 

Turning from a statement of purpose to the record of 
achievement, the broad outlines of the income tax of 
1913 may now be noted. The net incomes of all single 
persons in excess of $3,000 (married persons, $4,000) 
were subjected to a normal income tax of one per cent 
on the excess over $3,000 (married persons, $4,000). In 
addition to this normal tax, there was also an additional 
tax or surtax upon persons whose incomes exceeded 
$20,000, which w^as graduated according to the following 
scale : 

Income Surtax, per cent. 

$20,000 to $50.000 1 

50.000 to 75.000 2 

75,000 to 100.000 • 3 

100.000 to 250,000 4 

250,000 to 500.000 5 

500,000 and over 6 

The highest rate under this tax was thus seven per 
cent, (normal and additional upon the largest incomes). 
The Act was retroactive, applying the first year to 
income received between March 1 and December 31, 
1913, and thereafter to the income received during the 
calendar year. Tax returns were to be made before March 
1 of the ensuing year and the tax paid in June. The 
yield from the income tax was considerably less during 
the first year than had been estimated by the Secretary 
of the Treasury, but with greater experience and a 
better trained corps of officials, more was secured in 
subsequent years from this source. 

266 



TAXATION IN THE UNITED STATES 

In addition to the personal tax on individual incomes, 
the Revenue Act of 1913 also imposed a corporation 
income tax. The special excise tax of one per cent, on 
net profits over $5,000 of corporations, joint-stock com- 
panies, and associations organized for profit, which had 
been first levied in 1909, was extended in 1913 to all 
the net earnings in excess of $5,000. 

For the three fiscal years during which this Act was 
in force, the yields of the personal and corporation 
income taxes were as follows : 



Income Tax Yield, 1914 to 1916 





Personal 


Corporations 


Total 


1914 


$28,253,525 
41,046,162 
67,957,489 


$43,127,740 
39,144,532 
56,909,942 


$71,381,273 


1915 


80,190,694 


1916 


128,867,430 







The numbers of persons who were assessed for the 
income tax during these three years were 357,598, 
357,515, and 374,652, respectively. In the first year 
the normal tax of one per cent, on all taxable income 
of individuals produced $12,728,028, and the surtaxes 
on incomes over $20,000 a year yielded $15,525,497. Of 
this group those with incomes over $100,000 a year paid 
$9,628,381, or about one-third of the total amount paid 
by individuals. These proportions were not essentially 
changed in the two subsequent years. 



The European War, which broke out in midsummer 
of 1914, immediately affected the revenues of the 
Federal Government and necessitated the imposition of 

267 



WAR COSTS AND THEIR FINANCING 

additional taxes to make good the decline in cus- 
toms duties. Accordingly the so-called '' emergency 
revenue " law of October 22, 1914, was enacted, which 
the Secretary of the Treasury estimated would bring 
in $54,000,000 in the fiscal year 1915 and $44,000,000 
in the following year. This was to run until December 
31, 1915, but as it was obvious before that date arrived 
that the war would continue much longer, it was 
extended by joint resolution of December 17, 1915, for 
another year. On the whole, this Act taxed business 
rather than wealth, for it imposed special taxes on 
bankers, brokers, commission merchants, proprietors of 
places of amusement, and tobacco dealers, as well as 
stamp taxes on certain legal and business documents, 
on tickets, telephone and telegraph messages, insurance 
premiums, perfumery and cosmetics, and chewing gum. 
The rate on fermented liquors was raised 50 per cent., 
and new taxes were imposed on wines, artificially car- 
bonated waters, and cordials.^ 

By the end of 1915 it was evident that additional 
revenue would have to be raised, and President Wilson 
proposed in his message of December 7 that it be secured 
by extending the list of articles in the Emergency Act 
and by expanding the internal revenue system. Con- 
gress, however, preferred to tax wealth rather than 
industry and refused to carry out the executive pro- 
gram. The President recommended an increase in the 
surtaxes on incomes and a lowering of the exemp- 
tion, and new taxes on gasoline, naphtha, automobiles, 
internal-combustion engines, fabricated iron and steel 
products, pig iron, and bank checks. But Congress 
rejected the whole plan except the increases in the sur- 

■ A list of these commodities, together with the rates imposed 
upon them will be found in the Appendix. 

268 



TAXATION IN THE UNITED STATES 

taxes on the larger incomes, which were incorporated in 
the Act of September 8, 1916. 

It had become evident to all, however, that the 
European War would continue longer than had been 
anticipated and that a more permanent and lucrative 
tax system must be provided. Moreover, it was clear 
that reliance could not be placed upon customs duties, 
which had already shown a considerable falling off, for 
imports would undoubtedly continue to be restricted 
for a considerable period, not only during the war, 
but even after peace was declared. The necessary 
revenues must therefore be raised by a further develop- 
ment of internal tax:ation. The answer to the fiscal 
problem thus presented was given by Congress in the 
Revenue Act of September 8, 1916, which was designed 
especially to meet the extensive Army and Navy pro- 
gram of August, 1916. 

The debate in Congress on this measure was compli- 
cated by the fact that it was a war measure, the larger 
revenue to be raised being necessitated by the prepared- 
ness program. But in spite of that fact there was 
evidenced in the discussion a determination to impose 
the added burden upon wealth rather than upon busi- 
ness or upon the mass of the people through consumption 
taxes. As typical of the different convictions that found 
expression, three or four speakers may be quoted, both 
in opposition to, and in defense of, the bill. 

Mr. Collier of Mississippi stated the Democratic 
position as follows:® 

We have to raise a certain amount of money to provide 
national defense. Only one question presented itself: How 
can this be raised so that the burden will fall lightest upon 

* Congressional Record, Ixiii, p. 12136. 

269 



WAR COSTS AND THEIR FINANCING 

tli£ American people? We have done this by increasing the 
income tax, and adding the inheritance tax, and the tax on 
munitions. 

Said Mr. Keating of Colorado :^ 

This bill provides for a total of $225,000,000 of new 
revenue, and not one dollar of that vast sum will be raised 
by a tax on the necessaries of life. Every dollar will come 
from the purses of those who are most capable of making 
tl e contribution — the very rich men of the country. It 
was not until the advent of the Wilson Administration that 
any serious attempt was made to equalize the burden by 
compelling wealth to bear something like its just share. 

Mr. Crisp of Georgia argued for the Act in a similar 
strain and concluded:^ '' The bill we are now con- 
sidering raises the entire amount necessary to pay the 
expenses of preparedness from the wealth of the 
country. ' ' 

Perhaps the most radical, not to say vindictive, speech 
made during the progress of the debate on this measure, 
was one by ]\Ir. Bailey of Pennsylvania.^ In spite of 
mixed metaphor and trite phrases, his view deserves 
attention as indicating the attitude of some, at least, of 
the supporters of the Act. According to him, the most 
important feature of the whole bill was the fact that 
the burden of the wa.r expenditure was placed on those 
chiefly responsible for promoting war. This proceeded 
from Wall Street and from those whose interests 
centered there. 

They have done the dancing, they must pay the piper. . . . 
Wealth must foot the bill. . . . This is something new 
' Ihid., p. 12485. 
'Ihid., p. 12109. 
'Ihid., p. 12151. 

270 



TAXATION IN THE UNITED STATES 

under the sun. . . . Always the great and powerful neither 
did the fighting nor paid the bill. Both fell to the poor and 
lowly. For once the program had been changed. . . 
If we are to have something which approximates an 
evening-up process, there will be occasion for philosophical 
satisfaction. 

Mr. Hill of Connecticut, who opposed the Act, 
asserted that it was proposed to meet the expenses of 
defense by 

unloading the whole of this additional burden by a doubled 
income tax upon one-third of one per cent of our population, 
and in another form upon the graves of the dead, and the 
surviving w^idows and orphans . . . and, in still another 
form, upon carefully selected industries which you think 
can be safely plundered and with good results. Is it not 
robbing the few to pay the equitable obligation of the many'?^^ 

It is evident that there was intended in this Act a 
definite return to the principle of taxing wealth which 
had been temporarily superseded by the business taxes 
of the emergency revenue measure of October 22, 1914. 
The Act contained six titles, covering the income tax, 
estate or inheritance tax, munitions-manufacturers' tax, 
miscellaneous taxes, dyestuffs, and printing paper, of 
which, however, only the first four were revenue 
measures. 

The income tax clause of the Act of September 8, 
1916, practically repealed the former law. The rate of 
r.:e normal income tax, both upon individuals and upon 
corporations, was doubled, being increased from one 
por cent, to two per cent. At the same time the addi- 
tional tax rates on personal incomes over $20,000 were 
raised, and a somewhat finer classification of income 
^^^oups was introduced. The corporation income tax 

''Ibid., p. 12104. 

271 



WAR COSTS AND THEIR FINANCING 

was doubled, being raised from one per cent, to two 
per cent. The annexed table shows the rates of the 
surtaxes on personal incomes under the new law : 



Incomes 
$20,000 to $40.000 


Surtax, per cent 
1 


40,000 to 


60,000 


2 


60.000 to 


80,000 


3 


80,000 to 


100,000 


4 


100,000 to 


150,000 


5 


150,000 to 


200.000 


6 


200,000 to 


250 000 


7 


250,000 to 


300,000 


8 


300,000 to 


500,000 


9 


500,000 to 


1,000.000 


10 


1,000 000 to 


1.500,000 


11 


1,500.000 to 


2.000.000 


12 


Over $2,000.000 


13 



The tax under this new Act began, therefore, with 
two per cent, on the smaller incomes of individuals, 
jumped to 3 per cent, on incomes from $20,000 to 
$40,000, and then progressed by rather uneven incre- 
ments until it reached a maximum of 15 per cent. 
(normal and additional) on incomes in excess of 
$2,000,000 a year, which was the highest jate yet 
imposed in the United States. 

There was one administrative feature common to this 
Act and the earlier Act of 1913 which should be noted 
at this point, both because of the discussion which it 
aroused and because of the fluctuation in policy regard- 
ing it which characterized the subsequent income tax 
legislation. This was the so-called ^* collection-at-the- 
source " provision under which the burden was placed 
upon corporations, associations and employers who should 
make payments to any taxpayer in excess of the mini- 
mum exemption of deducting the amount of the normal 
tax from such excess and remitting it directly to the 

272 



TAXATION IN THE UNITED STATES 

Treasury. The collection-at-tlie-source feature greatly 
complicated the administrative work. 

The section imposing an estate or inheritance tax 
marked a new departure in Federal taxation. Down to 
this time inheritance taxes had been reserved exclusively 
for the use of the separate states and 42 of them were 
now deriving part of their revenues from this source. 
The action of the Federal Government in encroaching 
upon this field was severely criticized/^ but the need for 
additional revenue and the desire on the part of Congress 
to tax accumulated wealth more heavily led to the selec- 
tion of this source. The Federal inheritance tax estab- 
lished by the Act of September 8, 1916, was levied on 
the entire value of the net estate, not upon the dis- 
tributive shares, a method which made the actual rates 
heavier than they appear at first glance, for there were 
none of the various deductions allowed under the state 
inheritance tax laws. On the other hand, such a pro- 
vision greatly simplified the administration. An 
exemption of $50,000 might be deducted in estimating 
the value of the net estate, and various other deductions 
were allowed for funeral expenses, support of depend- 
ents during the settlement of the estate, and similar 
charges. The tax must be paid within a year or the 
assets might be sold to pay the tax. The rates estab- 
lished from time to time applied only to estates created 
by death after that date. The tax was progressive 
according to amount but not a,ccording to kinship, as 
was usual under the state inheritance tax laws. The 
accompanying table shows the rates of the Federal estate 
tax of September 8, 1916, on net estates above the 
exemption of $50,000: 

" See, for example, the papers on Federal taxation of inheritances 
read at the annual conferences of the National Tax Association. 

273 



WAR COSTS AND THEIR FINANCING 

Net Taxable Estate Rate, per cent. 

Not exceeding $50.000 1 

$50,000 to 150.000 2 

150,000 to 250,000 3 

250,000 to 450.000 4 

450.000 to 1,000,000 5 

1,000,000 to 2.000.000 6 

2,000,000 to 3.000.000 7 

3,000,000 to 4.000,000 8 

4,000.000 to 5,000,000 9 

5,000,000 and over 10 

Owing to administrative difficulties in checking estates, 
allowance of claims necessary before net estate could be 
determined, and other delays, this tax yielded only a 
comparatively small amount of revenue. For the last 
three months of the calendar year 1916 the revenue 
from this source amounted to $6,828,643. 

A new feature in American finance introduced by 
this Act was the imposition of the munitions-manufac- 
turers' tax in addition to the income tax. This was an 
excise tax upon corporate and individual manufacturers 
of war munitions of 121/2 per cent, of the entire profits 
from the sale of such articles manufactured within the 
United States for the calendar year 1916 and thereafter 
until one year after the proclamation of peace. It was 
superseded the following year by the Act of October 3, 
1917, wiiich reduced the rate to 10 per cent, for the year 
1917 and provided that it should cease to be effective 
on January 1, 1918. This tax was the first application 
of the war profits tax, which was later to be expanded 
so as to include profits from all war contracts. For the 
year 1916 returns were made by 498 firms, of which 
269 were found to be taxable. The tax revenue from 
these amounted to $27,663,929. • For the year 1918 the 
revenue amounted to $13,296,927. The tax was a dis- 
appointment as a revenue producer, owing chiefly to the 

274 



TAXATION IN THE UNITED STATES 

liberal allowances that were made for depreciation. As 
the duration of the war was uncertain, a large amount 
of the capital investment for expansion of existing 
plants or the building of new ones was charged up 
against costs. This rendered taxable profits much smaller 
than would have been the case in a normal business and 
accounts for the large number of exemptions of firms 
which made returns. 

The fourth title of the Act of September 8, 1916, 
raised the taxes on wines and imposed special excise 
taxes on manufacturers of tobacco, cigars, and cigarettes, 
ship brokers, and corporate capitalization. The special 
corporation excise tax was 50 cents for each $1,000 of 
the " fair value " of the capital stock, but a deduction 
of $99,000 of capitalization was allowed. The so-called 
war revenue taxes levied under the emergency Act of 
October 22, 1914, were repealed. 

Within six months after the Act of September 8, 1916, 
was passed, it was amended. On February 1, 1917, 
diplomatic relations with Germany were severed, and 
it appeared probable that war would follow, if no change 
were made by Germany in her submarine warfare. It 
became necessary, therefore, to provide adequate 
revenues for all eventualities. The Act of March 3, 1917, 
w^as accordingly passed, which bore the significant title, 
*' An Act To provide increased revenue to defray the 
expenses of the increased appropriations for the Army 
and Navy and the extension of fortifications and for 
other purposes." 

A novel and important feature of this Act was the 
segregation of the larger part of the revenues to be 
raised under its provisions for the purposes named in 
the title and for no other. Preparedness was thus to 

275 



WAR COSTS AND THEIR FINANCING 

be financed by the taxes provided for. The first of these 
was the excess profits tax, which was levied in addition 
to existing taxes upon the net incomes of all corpora- 
tions and partnerships having an income of more than 
$5,000, such tax to be at the rate of eight per cent, per 
annum upon the profits in excess of eight per cent. As 
the rate of the existing corporation income tax was two 
per cent, on the net income, a corporation whose profits 
exceeded eight per cent, for the year and were not 
less than $5,000 would be subject to a combined tax 
of 10 per cent. The Act was made effective from Janu- 
ary 1, 1917, but because of the short time intervening 
between the date of approval of the Act and the end of 
the fiscal year, the entire amount of revenue collected 
under its provisions by June 30 amounted to only 
$2,953. This Act was superseded by that of October 3, 
1917, which was made to apply to the whole calendar 
year 1917. 

The rates of the estate and inheritance taxes pre- 
scribed by the Act of September 8, 1916, were increased 
50 per cent, under the Act of March 3, 1917. The rates 
therefore ran from 1% per cent, on net estates not 
exceeding $50,000 up to 15 per cent, on estates in 
excess of $5,000,000. The revenue collected under this 
Act for the year 1917 amounted to $47,452,879. 

On April 6, 1917, Congress declared that because of 
repeated acts of aggression on the part of Germany, 
a state of war existed between that country and the 
United States. The immediate needs of the Treasury 
for war purposes were met by issues of certificates of 
indebtedness and by the flotation of the First Liberty 
Loan, but Congress at once set to work to frame a 
revenue measure that would bring in returns adequate 

276 



TAXATION IN THE UNITED STATES 

to finance the war costs which the United States had 
assumed. The War Revenue Act of October 3, 1917, 
which was passed to provide the necessary revenues, was 
estimated to yield $3,400,000,000 for the fiscal year 
ending June 30, 1918.^- The actual yield for the fiscal 
year in which it was enacted was $3,696,043,485.^^ This 
Act contained some 12 titles, the most important of 
which were those dealing with the income and the 
excess profits taxes, though resort was now had on a 
considerable scale to internal revenue and excise taxes. 
On the whole, however, the burden of the new revenue 
law took the form of direct taxation, rather than of 
indirect/* 

The income tax provisions left the Act of September 
8, 1916, in full force, and in addition imposed new rates, 
so that the total tax to which the income taxpayer under 
the new Act was liable was a combination of two rates. 
Exemptions under the new law were $1,000 for single 
persons and $2,000 for married. An additional exemp- 
tion of $200 was allowed for each dependent child. The 
normal tax, which applied to all net incomes above the 
exemption, was two per cent, under the new law, and 
was in addition to the normal tax under the old law; 
thus the normal tax on an unmarried person without 
dependents was two per cent, on income above $1,000 
and under $3,000, and four per cent, on all income 
above $3,000. Considerable unnecessary complications 
and confusion were occasioned by this superimposition 
of the war income tax upon the former income tax, 
instead of combining them into one single tax. T':e 

*^ Report of the Secretary of the Treasury, 1917, p. 71. 

^'Ihid., 1918, p. 126. 

" Indirect taxes yielded the following proportion of total tax 
revenues: 89 per cent, in the fiscal year 1914, 60 per cent, in 
1917, and 24 per cent, in 1918. 

277 



WAR COSTS AND THEIK FINANCING 

reason may possibly have been the belief on the part 
of Congress that the war income tax was only a 
temporary measure and that it could later be repealed 
without disturbing the existing rates. 

As a result of much agitation, the so-called method 
of " information at the source " was substituted for 
" collection at the source " in cases where payments 
above the tax-exempt minimum were involved. Collec- 
tion at the source, however, continued to apply to non- 
resident aliens. 

In addition to the normal tax, surtaxes were imposed 
upon all net incomes over $5,000, which were levied in 
addition to those provided for under the Act of 
September 8, 1916. The combined rates, therefore, 
ranged from one per cent, on net incomes between $5,000 
and $7,500 up to 63 per cent, on incomes over $2,000,000. 
The rates on the various income groups are shown below : 







Law of 


Law of 




Surtax on net income 


September 


October 


Total 


between — 


8, 1916, 


3, 1917, 


surtax, 






per cent. 


per cent. 


per cent. 


$ 5,000 and 


$7,500 


None 


1 


1 


7,500 and 


10,000 


None 


2 


2 


10,000 and 


12,500 


None 


3 


3 


12,500 and 


15,000 


None 


4 


4 


15.000 and 


20,000 


None 


5 


5 


20,000 and 


40,000 


1 


7 


8 


40,000 and 


60,000 


2 


10 


12 


60,000 and 


80,000 


3 


14 


17 


80.000 and 


100,000 


4 


18 


22 


100;000 and 


150.000 


5 


22 


27 


150,000 and 


200,000 


6 


25 


31 


200,000 and 


250,000 


7 


30 


37 


250,000 and 


300,000 


8 


34 


42 


300,000 and 


500,000 


9 


37 


46 


500,000 and 


750,000 


10 


40 


50 


750.000 and 


1,000,000 


10 


45 


55 


1,000,000 and 


1,500.000 


11 


50 


61 


1,500,000 and 


2,000,000 


12 


50 


62 


Over $2,000,000 




13 


50 


63 



278 



TAXATION IN THE UNITED STATES 

It will be seen that as a result of these changes tie 
minimum exemption limit was considerably reduced, 
though it still stood far above the minimum exemption 
permitted under the income tax laws of any other coun- 
try. At the same time the rate of the normal tax was 
doubled. But perhaps the most important change, and 
the one which most affected the revenue producing 
character of the law, was the changes that were made in 
the surtaxes. The minimum income subjected to the 
surtax was reduced from $20,000 to $5,000, which, 
according to the tax returns of the preceding year, must 
have subjected something over 200,000 taxpayers to the 
operation of the surtaxes. These changes constituted 
a material improvement, for the tax was now no longer 
confined to a small group of wealthy taxpayers, but 
reached down into the lower income groups. At the 
same time, the progression of the rates was tremendously 
steepened, so that the highest rate on incomes over 
$2,000,000, which under the old law had been 13 per 
cent., was now made 50 per cent, under the new law, 
thus giving a combined rate on the larger incomes of 
63 per cent. As a result of these changes, the income 
tax had become a real war income tax. 

The rates of the surtax were now the highest levied 
in any country in the world, but their severity was 
greatly mitigated by the exemptions granted under the 
various Bond Acts and the constitutional provisions 
controlling the taxation of state and municipal bonds 
in the United States. The result was that the amount 
of taxable income that a given individual possessed was 
determined not merely by its size, but also by its char- 
acter. The purpose of Congress to have the rates 
progress according to amount of income was, therefore, 
partially defeated, or at any rate rendered uncertain. 

279 



WAR COSTS AND THEIR FINANCING 

Although this was a defect resulting from the exemption 
of bonds from taxation, the application of the principle 
of progression was sound from the point of view both 
of justice and of obtaining the largest possible amount 
of revenue. If use was to be made primarily of direct 
taxation for war purposes, it was evident that great 
reliance would have to be placed upon the income tax. 
The war excess profits tax formed, together with the 
income tax, the bulwark of revenue during the war.^^ 
The tax imposed by the Act of October 3, 1917, super- 
seded that of the previous law of March 3; it levied 
a tax upon the income of every corporation, partnership, 
and individual, and applied to all trades, businesses and 
occupations with certain specified exceptions. The tax 
was levied for each taxable year upon the net income in 
excess of a certain deduction at the following - rates : 

Excess Profits Tax (Act of October 3, 1917) 
If profits from invested capital ' Rate on Taxable 

above deductions are Xet Income is 

Below 15 per cent 20 per cent. 

15 to 20 per cent 25 per cent. 

20 to 25 per cent 35 per cent. 

25 to 33 per cent 45 per cent. 

Over 33 per cent 60 per cent. 

The taxable year was defined to be 12 months ending 
December 31, 1917, and each calendar year thereafter, 
or the fiscal year of the taxpayer. The pre-war period 
included the calendar years 1911 to 1913, or as many of 
them as the taxpayer was engaged in business. The 
deduction from net income was. carefully defined, and 
was differentiated for the three cases of (1) a domestic 
resident taxpayer in business during the whole pre-war 

^^ The income and excess profits taxes constituted 44.4 per cent, 
of the entire collections of internal revenue in 1917, and 76.8 per 
cent, in 1918 (Report of the Secretary of the Treasury, 1918, 
p. 371). 

280 



TAXATION IN THE UNITED STATES 

period; (2) one in business during a part only of the 
pre-war period; and (3) a foreign or non-resident tax- 
payer. In the first case the deduction consisted of 
between seven and nine per cent, of the invested capital 
plus $3,000 in the case of a domestic corporation and 
$6,000 in the case of a domestic partnership or indi- 
vidual. In the second case the percentage was fixed at 
eight per cent, and the lump-sum exemption remained 
the same. In the third case the exemption was the 
same as for the domestic corporation or individual but 
without the lump-sum exemption. In the case of a trade 
or business having no invested capital, or not more than 
a nominal capital, there was a flat tax of eight per cent, 
of the net income in excess of $3,000 in the case of a 
domestic corporation and $6,000 in- the case of a domestic 
partnership or resident of the United States. Net 
income and invested capital were further defined. 

The excess-profits tax proved a great fiscal success, 
the 1917 yield as shown in the returns for the year 
ending June 30, 1918, being as follows : 



Individual excess profits tax $88,731,080 

Partnership excess profits tax 93,125,653 

Corporate excess profits tax 2,045,713.085 



Total $2,227,569,818 

In commenting upon this tax the Committee on War 
Finance of the American Economic Association^^ made 
the following observation : 

At a time when revenue was a paramount consideration, 
this result is greatly to the credit of the tax, and, considered 
in a broad way, is ample justification of its enactment. When 

^® Report, printed as Supplement No. 2 of the American 
Economic Review, March, 1919. p. 15. 

281 



WAR COSTS AND THEIR FINANCING 

this is said, however, praise must end, and criticism begin; 
for it appears certain that the success of the tax was due 
not so much to the manner in which the law was drawn, as 
to the skill and good judg-ment of the internal revenue depart- 
ment in administering the Act and to the loyalty of the tax- 
paj^ers in comj^lying as best they could with the crude, obscure 
and, in many ^vays, harsh and unequal revenue measure. 

The criticisms contained in this valuable report were 
admirably summed up by the chairman of the committee, 
and from his summary the following brief extract may 
be quoted :^^ 

The law undertook to lev}^ the tax at rates varying with 
the percentage which the taxable income bears to the invested 
capital. Statistics show, as might have been expected, that 
the tax collected bore no necessary relation to war profits, 
and imposed much heavier rates upon small, than upon large, 
concerns. . . . Great difficulties, have been encountered 
in administering the present law in defining invested capital, 
especially in connection with capital invested in nontaxable 
securities; in the case of borrowed capital in cases where 
corporations had issued stock for the purchase of tangible 
property; in connection w^ith value of good will, and in the 
provision made for patents and copjTights. In the definition 
of income also, several difficulties have risen, especially in 
connection with the limitation of deductions, on account of 
salaries actually paid in the case of profits which fluctuate 
from year to year; in the case of industry carried on with 
different degrees of risk and different degrees of stability, 
and in the case of net income in excess of the specific 
exemptions. Other great difficulties appeared in connection 
with the determination of nominal capital. In fact, had it 
not been for the administrative discretion exercised by the 
internal revenue department which went to the extreme limit, 
and perhaps even transcended the limit, in interpreting the 
law, the • results would have been far more unsatisfactory 
than was actually the case. 

^'Ihid., p. 120. 

282 



TAXATION IN THE UNITED STATES 

The war estate or inheritance tax was contained in the 
ninth title of the Act, but may best be described with 
the two foregoing taxes, as it was a direct tax and fell 
upon large wealth. It was superimposed upon the 
estate tax of the Act of September 8, 1916, as amended 
by the Act of March 3, 1917, in the same way as the 
income tax was superimposed upon the earlier one. It 
will be remembered that the original Act had levied a 
tax ranging from one per cent, on net estates not in 
excess of $50,000 to 10 per cent, on esta,tes in excess 
of $5,000,000, and that these rates had been increased 
50 per cent, by the Act of March 3, 1917. A similar 
addition was now decreed by this measure, so that the 
total rates were double those of the original law. But 
in addition to this, three new groups were added at the 
top of the list upon which still higher rates were 
imposed, so that as the law finally stood, the highest 
rate was 25 per cent, on estates over $10,000,000. The 
original exemption of $50,000 was continued in this 
Act. The combined rates as they stood after the passage 
of the law of October 3, 1917, were as follows : 

Inheritance Tax, Act of October 3, 1917 

Net Taxable Estate Total Rate, per cent. 

Under $50.000 2 

$50,000 to 150,000 4 

150,000 to 250.000 6 

250.000 to 450.000 8 

450,000 to 1,000,000 10 

1,000,000 to 2,000.000 12 

2,000,000 to 3,000,000 14 

3,000,000 to 4,000.000 16 

4,000.000 to 5,000,000 18 

5.000.000 to 8,000.000 20 

8,000,000 to 10,000,000 22 

Over 10,000,000 25 

The Act went into effect immediately upon its passage, 

283 



WAR COSTS AND THEIR FINANCING 

so that the revenues derived during the calendar year 
1917 from the Federal estate tax were obtained under 
three separate enaetments. It is not possible to trace 
the effects of changes in legislation upon the yield, but 
the total revenues from this source for the year aggre- 
gated $47,452,879. 

Titles III and lY of the Act provided for increased 
taxes on beverages and tobacco. The rates on distilled 
spirits were increased from $1.10 per gallon to $3.20 
when used for beverage purposes and $2.20 when used 
for other purposes. The rates on beer and wine were 
doubled, and new taxes were laid upon soft drinks. 
Instead of a flat rate of $3.00 per thousand on cigars, 
a progressive scale was introduced which was graduated 
according to the selling price. The rates on cigarettes 
and manufactured tobacco were also considerably 
increased. In view of the needs of the Treasury, the 
advances in the rates on these articles, which had the 
advantage of being semi-luxuries and of yielding very 
large returns, must be regarded as very moderate. The 
result of the increases, as shown in the receipts for the 
fiscal year ending June 30, 1918, was an increase from 
$387,000,000 to $600,000,000 in the revenues from 
liquors and tobacco. 

A new set of taxes was provided for in the next 
section of the Act, namely, war taxes on facilities 
furnished by public utilities and insurance. These con- 
sisted of taxes varying from three to 10 per cent, on 
freight charges, passenger fares, Pullman tickets, and 
pipe-line transportation, and of stamp taxes ranging 
from one cent on express packages to five cents on tele- 
graph and telephone messages. Taxes on fire, marine, 
and casualty insurance of one cent per $1 of premium, 
and on life insurance of eight cents per $100 of policy, 

284 



TAXATION IN THE UNITED STATES 

were also levied. Excise taxes, too, were imposed upon a 
number of articles of luxury; these paralleled very 
closely the Englisli procedure along this line, the purpose 
of which was not merely to fill the Treasury, but also 
to curtail extravagance and useless expenditure. They 
covered automobiles, automobile trucks, and motorcycles, 
musical instruments, motion-picture films, jewelry, 
sporting goods, patent medicines, perfumes, cosmetics 
and toilet preparations, chewing gum, cameras, and 
boats and yachts. These were really excise taxes levied 
upon the manufacturer or importer; for the most part 
they amounted to between two and three per cent, of 
the price. 

The growing popularity of motion-picture shows was 
probably responsible for the inclusion within this Act 
of a war tax on admissions and dues, both of which 
were new as Federal taxes in the United States. A tax 
on admissions of one cent for every 10-cent charge was 
imposed. Club dues were also taxed 10 per cent, if in 
excess of $12 a year. The stamp taxes provided for in 
the Act of October 22, 1914, were practically reenacted. 
The rate on playing cards, however, was raised from 
two cents to seven cents, and a new tax of one cent 
for each 25-cent charge was imposed on parcel-post 
packages. 

The yield from all of the various taxes just enumer- 
ated amounted to $952,000,000 for the fiscal year 1918, 
which was an increase of $311,000,000, or 33 per cent., 
over the preceding year. This increase was in spite of 
a fall of $46,000,000 in customs duties. It may be 
pointed out in this connection that no attempt had as 
yet been made to impose any taxes upon the more neces- 
sary articles of general consumption among the masses, 
such as tea, coffee, cocoa, sugar, and similar articles. 

285 



WAR COSTS AND THEIR FINANCING 

The expenditures of the United States for the month 
of October, 1917, that in which the Revenue Act was 
passed, amounted to $165,000,000. From this time on, 
as the military operations expanded, the expenditures 
increased at an extraordinarily rapid rate and far out- 
ran the revenue capacity of the tax measures. By 
September, 1918, the monthly expenditures were 
$1,625,000,000, or almost four times as great as they 
had been a year before. If the Treasury policj^ of 
paying a proportion of approximately one-third of the 
expenditures out of taxes was to be continued, it was 
evident that new sources of revenues must be tapped 
and old ones made more lucrative. The tax revenues 
amounted to no more than $4,173,800,000 for the year 
ending June 30, 1918. 

In ]\Iay, President "Wilson urged the matter upon the 
attention of Congress, and in . June the Secretary of 
the Treasury, in a letter to Claude Kitchin, Chairman 
of the House Committee on Ways and Means, stated 
that the expenditures for the coming fiscal year would 
probably amount to $24,000,000,000, and suggested that 
one-third of this amount should be provided for out of 
revenue. In accordance with this suggestion, a bill 
was presented to the House of Representatives on Sep- 
tember 3, 1918, which it was estimated would raise this 
amount. The bill was promptly passed by the House, 
but while it was under consideration by the Senate 
Committee on Finance, hostilities were brought to an 
abrupt close by the signing of the Armistice on Novem- 
ber 11. As a result of this event, the estimates of 
expenditures of the Government were reduced from 
$24,000,000,000 to $18,000,000,000 for the fiscal year, 
and the taxes provided for under the new Act were 
therefore cut down from $8,000,000,000 to $6,000,000,- 

286 



TAXATION IN THE UNITED STATES 

000, still preserving the ratio of one-tliird. *' Taxes 
which can be easily borne amid the feverish activity 
and patriotic fervor of war times are neither so welcome 
nor so easily sustained amid the uncertainties, the 
depreciating inventories, and the falling market which 
are apt to mark the approach of peace," said Senator 
Simmons, the Chairman of the Committee on Finance, in 
reporting the bill to the Senate on December 6, 1918. 

Owing to the military and political changes which 
occurred while the bill was under consideration and to 
party differences in the two houses of Congress, the bill 
did not become law until February 24, 1919. In spite 
of the date of its final enactment, however, the measure 
is officially known as the '' Revenue Act of 1918." As 
finally enacted, the law provided for raising about 
$6,000,000,000, of which about four-fifths was to be 
derived from income, war excess profits, and estate 
taxes, and the remainder from indirect taxes which fell 
for the most part upon luxuries and semi-luxuries. Few 
new sources of revenue were added to the list comprised 
in the earlier Acts. The Act of February 24, 1919, 
practically codified the earlier measures, repealing 
their revenue sections/^ and introducing numerous 
amendments. 

The changes made in the income tax were numerous 
and drastic. The exemptions remained as they had been 
under the law of October 3, 1917, at $1,000 for a single 
person and $2,000 for a married person, together with 
$200 for each dependent person. The rate of the normal 
tax was fixed at 12 per cent, on the net income in excess 
of the exemption except that in the case of a citizen or 
resident of the United States the rate on the first $4,000 
of such excess was six per cent. These rates applied 

^« Section 1400. 

287 



WAR COSTS AND THEIR FINANCING 

only to the calendar year 1918 ; for subsequent years the 
rates were fixed at eight and four per cent, respectively. 
There was thus provided a certain element of progression 
in the normal tax which was designed to ease the burden 
to the small income receivers with less than $5,000 or 
$6,000. Even with this allowance the new rates repre> 
sented a notable increase over those of the previous 
laws. 

The changes introduced in the surtaxes provided for 
a finer classification of income groups and less abrupt 
jumps in the rates than had existed under the previous 
Act. The point at which the surtaxes were first applied 
remained the same, namely, $5,000; from one per cent, 
on incomes of this size the rates progressed very 
steadily, at the rate of one per cent, on each additional 
$2,000, on incomes up to $100,000, after which the 
progression was less regular, reaching a maximum of 
65 per cent, on incomes over $1,000,000. Under the 
previous rate the highest surtax had been 63 per cent, 
on incomes over $2,000,000. These changes must be 
regarded as a great improvement from the point of view 
of a scientific and equitable adjustment of rates, as 
well as from the point of view of lucrativeness.^^ 

The income tax on corporations was fixed at 12 per 
cent, for the calendar year 1918 and at 10 per cent, for 
subsequent years, on the net income in excess of the 
credits allowed. These credits comprised (1) the amount 
received as interest upon obligations of the United 
States; (2) the amount of excess profits taxes imposed 
under this same Act; and (3) in the case of a domestic 
corporation, $2,000 additional. 

The rates provided for under this Act were made to 

^^ A table of rates and of income groups will be found in 
Appendix. 

288 



TAXATION IN THE UNITED STATES 

apply to incomes received during the year 1918. In con- 
sideration of the fact that the rates were so high and 
that the payments under this law would be so heavy, the 
Treasury for the first time adopted the sensible pro- 
cedure of permitting the income tax to be paid in four 
quarterly installments, of which the first fell due in 
]\[arch and the second in June. Final statistics of the 
yield from the income and excess profits taxes for 1919 
and 1920 have not yet been published, but the follow- 
ing are the preliminary estimates of the Treasury 
Department for tliese two years, together with the 
actual returns from these two sources for the fiscal 
year 1918 : 

Income and Excess Profits Taxes, 1918-1920 



Individual income 
tax 

Corporation in- 
come tax 

Excess profits tax 



1918 



$615,008,503 
48,175.985 



$663,184,488 



1919 = 



$901,000,000 

400,000,000 
1,300,000,000 



$2,601,000,000 



1920^ 



$1,400,000,000 

650,000.000 
1,700,000,000 



$3,750,000,000 



*The actual receipts of the Treasury were greater than these 
figures owing to the payment in these years of back taxes. 



The 1919 Act greatly changed and distinctly improved 
the excess profits tax. In this measure it was styled 
'^ war profits and excess profits " tax, and a distinction 
between war profits and excess profits was established. 
Individuals and partnerships were relieved from the 
excess profits tax, and the Act also permitted deduction 
of losses in transactions not directly connected with 

289 



WAR COSTS AND THEIR FINANCING 

trade or business and removed the limitation upon the 
deduction of interest upon indebtedness. As in the 
former Act, invested capital formed the basis of all 
computation. ]More careful definitions were given of 
such terms as " net income," " invested capital," 
" tangible and intangible property," '' inadmissible 
assets," and special provision was made for exceptional 
cases, for reorganizations, and for difficulties in inter- 
preting the law. After invested capital was determined, 
net incomes must be calculated according to prescribed 
rules. 

Excess profits and war profits were differentiated and 
subjected to slightly different treatment. In the 
former, a deduction of $3,000 and eight per cent, net 
income on invested capital was allowed to the taxpaj^er 
before division with the Government. In the latter, a 
deduction of $3,000 was allowed, and in addition an 
amount equal to 10 per cent, net income on invested 
capital, or, average pre-war net income on invested 
capital and 10 per cent, on any additional invested 
capital used in the taxable year. Fine distinctions were 
drawn in the matter of differentiating between pre-war 
net income and taxable year net income for corporations 
coming into being since pre-war days, but, broadly 
speaking, the legislative intent was to declare normal 
profits due to the taxpayer to be $3,000 and eight per 
cent, income on his investment, and in war industry, 
$3,000 and 10 per cent, on his investment. The excess 
over these deductions was taxed by the Government in 
the following percentages: 

(1) 30 per cent, between exemption and 20 per cent, on 
invested capital; 

(2) 65 per cent, over 20 per cent, on invested capital; 

290 



TAXATION IN THE UNITED STATES 

(3) 80 per cent, on the excess net income above the ex- 
emption, less the sums paid as taxes under (1) and (2). 

This rate applied for the calendar year 1918, but for 
1919 and thereafter the above 30 per cent, rate is 
reduced to 20 per cent., and the 65 per cent, rate is 
reduced to 40 per cent. Profits on United States war 
contracts were subject to special taxation computations. 
The severity of these rates, however, was modified by 
a provision fixing the maximum ratio of the tax to net 
income. It was provided that the tax imposed should 
in no case be more than 30 per cent, of the amount of 
the net income between $3,000 and $20,000 plus 80 per 
cent, of the net income in excess of $20,000. 

The estate or inheritance tax was remodeled by 
increasing the number of classes, a change which had 
the effect of reducing the rates on net estates between 
$750,000 and $2,000,000. In other respects the Act 
was substantially the same as that of October 3, 1917.2*^ 

The next seven titles of the Act dealt with taxes on 
transportation and other facilities and on insurance, 
beverages, cigars, tobacco, and manufacturers thereof, 
admissions and dues, excise taxes, special taxes, and 
stamp taxes. The tax on transportation, on freight and 
express, and on tickets was unchanged but the rate on 
Pullman tickets was reduced from 10 to eight per cent. 
The rate of the tax on telephone, telegraph, and cable 
messages between 15 and 50 cents remained at five cents, 
but a new tax of 10 cents was imposed when the charge 
was over 50 cents. A new tax of 10 per cent, was also 
imposed for leased wires. It was estimated that with 
these changes the revenue from the telephone and tele- 
graph taxes would be raised from $6,000,000 to 

^° The rates and groups are shown in Appendix. 

291 



WAR COSTS AND THEIR FINANCING 

$16,000,000. No changes were made in the insurance 
taxes as provided in the law of October 3, 1917. 

The tax on alcoholic liquors possesses only an academic 
interest in view of the ratification of the prohibition 
amendment to the Federal Constitution. Originally 
expected to provide over a billion dollars of revenue, 
the estimate was later reduced to half this sum. As 
finally enacted, the rate on distilled spirits was doubled 
if withdrawn for beverage purposes, being raised from 
$3.20 to $6.40 a gallon, but on spirits for non-beverage 
purposes the rate remains at $3.20. On still wines with 
less than 24 per cent, of alcohol the rates were doubled, 
as they were on sparkling wines, artificially carbonated 
waters, cordials, etc.; on still wines with over 24 per 
cent, of alcohol the rate remained the same. Other 
changes were made in the taxes on soft drinks and 
mineral waters. But the most important provision, not 
so much from the standpoint of revenue as because of 
the annoyance it has caused, was the tax of one cent 
on each 10-cent purchase at a soda fountain. The rates 
of the tax on cigars were raised about 50 per cent., and 
at the same time a slight reclassification of the retail 
price was made. A similar increase was imposed upon 
cigarettes. 

The rates of the tax on admissions were practically 
the same as in the previous Act, though some additional 
provisions were inserted, which exacted heavier rates 
from scalpers, from admissions to roof gardens and 
cabarets, and on purchases of food where no admission 
was charged. The rate of the tax on club dues remained 
unchanged at 10 per cent., but it was now imposed on 
dues over $10 a year. 

The excise taxes provided for in Title IX were divided 
by the Act into three parts; the first covered articles tlie 

292 



TAXATION IN THE UNITED STATES 

tax on which was to be paid by the manufacturer or 
importer; the second, those on which the tax was to be 
paid by the purchaser; and the third, those on which 
the tax was to be paid by the dealer. In the first group 
were included most of the articles that had been taxed 
under the Act of 1917, such as automobiles, musical 
instruments, sporting goods, and cameras; but on all 
of these, except automobile trucks, the rates were con- 
siderably raised. A number of other articles was added 
to this group, such as firearms, hunting knives, electric 
fans, thermos bottles, slot machines, liveries, hunting 
and riding habits, fur garments, and toilet soaps. 

The taxes on retail sales, which constituted the second 
group, followed the line of the luxury taxes introduced 
by France and England.^^ There was included under 
this head a miscellaneous assortment of excise taxes, 
some of which had been imposed under the previous 
Act, but which was now greatly enlarged by the addi- 
tion of a number of nonessentials and luxuries. There 
was evidently a double purpose back of this provision 
of the Act, one to obtain revenue and the other to check 
extravagance by taking toll of those who spent money 
on superfluities or on unnecessarily costly articles. 

A tax of 10 per cent, was imposed on prices in excess 
of specified minima, in the case of carpets, rugs, picture 
frames, trunks, valises, ladies' purses, lamps, umbrellas, 
fans, smoking jackets, waistcoats, hats, footwear, neck- 
wear, silk stockings, men's shirts, nightgowns, and 
kimonos. Another small group of articles, evidently 
regarded as pure luxuries, were taxed a certain per- 
centage irrespective of their price, such as jewelry, pre- 
cious stones, ivory ornamented articles, watches, etc. 

'^ See E. L. Bogart, " Luxury Taxes," in The Bulletin of the 
'National Tax Association, June, 1919, p. 237. 

293 



WAR COSTS AND THEIR FINANCING 

Finally, the third group of taxes, to be paid by dealers, 
included motion picture films, toilet articles, and 
medicinal compounds. 

The luxury tax, like the excess profits tax, has been 
one of the new fiscal results of the war, but it has not 
commended itself in the same degree as the latter. Great 
Britain has already permitted her luxury tax to lapse 
after about six months of operation ; France seems likely 
to retain hers, as it suits the national genius better than 
does the same tax in Anglo-Saxon countries. In the 
United States President Wilson had already urged the 
repeal of the tax on retail sales in his message to 
Congress of May 20, 1919. It is unlikely that this tax 
will be retained very long in our revenue system. 

Under the title ' ' Special Taxes ' ' provision was made 
for an excise tax on corporations, brokers, proprietors of 
theatres, circuses, bowling alleys, auto carriers, etc. A 
penal tax of $1,000 was also imposed on brewers, dis- 
tillers, and liquor dealers carrying on business in pro- 
hibition territory. Manufacturers of tobacco, cigars, and 
cigarettes were also taxed under this section, at rates 
distinctly higher than those levied under the existing 
legislation. Finally, the old tax of $1 a year on manu- 
facturers or distributors of opium was superseded by a 
comprehensive tax on importers, manufacturers and 
sellers of opium and other habit-forming drugs. An 
excise tax of $120 per year was imposed on wholesalers ; 
$24 a year on importers, manufacturers, or producers; 
$6 on retailers; and $3 a year on doctors, dentists, and 
others who used the drug in their profession. In addi- 
tion to these excises, a further tax of one cent per ounce 
was levied upon the drugs themselves. If any criticism 
is to be made of this tax, it is that the rates were not 
sufficiently heavy. 

294 



TAXATION IN THE UNITED STATES 

Stamp taxes were practically the same as provided for 
under the Act of 1917, though a few increases in exist- 
ing rates were made. 

The revenues of the Government by the main groups 
of sources, exclusive of postal receipts, have been as 
follows for the period of the war in Europe : 

Revenues of the United States, Fiscal Years 1914-1919 
{In millions) 



Source 


1914 


1915 


1916 


1917 


1918 


1919 


Customs 

Income and 
profits 

Miscellaneous in- 
ternal revenue 

Sales of public 
lands 

Miscellaneous. . . 


$292.3 

71.4 

308.7 

2.6 
59.7 


$209.3 

80.2 

335.4 

2.2 
70.8 


$213.2 
124.9 
384.7 

1.8 

54.8 


$225.7 

359.7 

449.7 

1.9 

81.2 


$182.8 

2,838.9 

857.0 

1.9 
293.2 


$183.4 

2,600.7 

1,239.5 

1.4 
622.5 


Total 


$734.7 


$697.9 


$779.4 


$1,118.2 


$4,173.8 


$4,647.5 



In addition to the revenue provisions already enumer- 
ated, the Act of 1918 included a provision which 
was designed to prevent the employment of child 
labor. Under the name of a tax a wholesome 
penalty in the form of a forfeiture of 10 per cent, 
of the net profits was imposed on any mine or quarry 
in which children under 16 are employed; and on 
any mill, cannery, workshop, factory, or manufactur- 
ing establishment in which children under 14 are 
employed, or children between 14 and 16 are employed 
more than eight hours a day, or between 7 p. m. and 
6 a. m. Heavy penalties were provided for the evasion 
of this provision. In view of the fate that overtook the 

295 



WAR COSTS AND THEIR FINANCING 

previous Federal Child Labor Act, it is doubtful whether 
this provision will be able to stand the constitutional 
tests. Already a test case has been brought which is 
designed to determine the validity cf the Act. Appeals 
have been filed from Federal court decrees in North 
Carolina which held that section of the statute invalid.^^ 

-^ ^Tashmgton Post, May 26, 1919. 



< » 



CHAPTEE X 

HOW SHOULD A WAR BE FINANCED? THE LESSON OF THE 
CIVIL WAR 

The problem of financing the Civil War — Chase's loan policy — 
Inadequacy of taxation — Issue of legal tender notes — Sys- 
tem of short term loans — Bond acts — Conclusions — Finan- 
cial management of the World War — Inability to meet 
current charges — Loans vs. taxes — Arguments for a loan 
policy — Disadvantages of heavy taxation — Arguments for 
a tax policy — Evils of excessive loans. 

It has been said that each generation learns only from 
its own experience and frequently repeats the mistakes 
of past ages. The financial management of the World 
War inclines one to believe this statement, for it has 
been necessary to thresh over again many old problems, 
and in not a few particulars there has been a repetition 
of earlier mistakes. A common experience in all great 
wars has been the belief that the particular struggle 
would be short-lived. It was expected that the Civil 
War would be over in a few months,^ and in the late war 
there were expressions of opinion from various quarters, 
otherwise well informed, to the same effect.^ To this 
belief and the consequent inadequate realization of 
present needs must be ascribed many of the failures of 
war finance. Because of this view Secretary Chase 
developed his insufficient and disastrous loan policy in the 
Civil War, and in the late war the hope of the speedy 
collapse of the Central Powers, so assiduously promul- 
gated by a willing press, undoubtedly affected the fisca^ 

^"Report on the Finances," 1861, p. 21. 

^ See ch. ii, supra; cf. also A. D. Noves, Financial Chapters of 
the War, p. 16ff. 

297 



WAR COSTS AND THEIR FINANCING 

policies of the leading Entente belligerents. As the 
financing of the World War has been overwhelmingly 
by means of loans, the financial conduct of the Civi] 
War, upon which history has already rendered its 
verdict, has a peculiar interest and offers some valuable 
lessons. 

The two main problems that were presented in the 
financing of the Civil War were, first, to determine the 
proper proportion between loans and taxes, and, second, 
to decide how best to raise the necessary funds by the 
method chosen. It is the purpose of the following pages 
to suggest that on both of these points serious mistakes 
were made.^ 

The financial management of the Civil War was 
inspired and directed primarily by Salmon P. Chase, 
who was Secretary of the Treasury from March, 1861, 
to July, 1864, and to him must be given the praise or 
blame for its conduct. The financial situation of the 
Treasury when Chase assumed office was disheartening.* 
Under Buchanan's administration the debt had been 
increased by $18,000,000, bringing it up to $74,985,000 ; 
the revenues had fallen off, and the public credit was 
undermined. The last issue of Treasury notes for 
$5,000,000 had been issued at 12 per cent, interest.^ 
It was estimated on January 18, 1861, by John A. Dix, 
then Secretary of the Treasury, that it would be neces- 

^ This account is taken from a paper read at a conference of 
the Wes'ern Economic Society at Chicago on June 21, 1917, and 
printed under the title, "Lessons from Our Past: The Financial 
Management of the Civil War." in Financial Mobilization for 
War. "pp. 68-84 ; it is now reprinted with the permission of the 
editor. 

* " A more difficult position than that of Secretary Chase at 
this moment few men have ever been placed in." (Appleton's 
American Annual Cyclopaedia, 1861, " Finances of the U. S.," 
p. 395.) 

" Bolles, Financial History of the United States, iii, p. 5. 

298 



HOW SHOULD A WAR BE FINANCED 

sary to raise $4-i,077,525 to meet outstanding and 
accruing dues before the close of the present fiscal year.*^ 
The Treasury was all but empty, the available funds 
amounting only to $1,716,000, and until Congress met 
for new legislation, Chase was forced to rely upon 
previous loan acts, under which authority existed for 
negotiating loans and for issuing Treasury notes to a 
total amount of about $41,000,000. On March 22, Chase 
advertised a loan of $8,000,000 at six per cent, and 
received bids aggregating $27,182,000 and ranging from 
85 per cent, to 100 per cent. Right here Chase made his 
initial mistake in the financial conduct of the Civil War, 
for he refused all offers under 94. By this act he was 
able to sell only $3,099,000 and was accordingly forced 
to issue the balance of $4,901,000 in Treasury notes. 
These Treasury notes were not Government paper 
money; they were made payable to the order of the 
person who received them, were transferable by indorse- 
ment, bore interest at six per cent., were convertible into 
bonds, and receivable in payment of all public dues. 
They were thus short-time notes, like I. 0. U.'s of an 
impecunious debtor, and should have been reserved for 
pressing emergencies. It was certainly a bad principle 
to issue them at the beginning of a war, and their use 
undoubtedly helped to undermine public credit, for they 
fell due while the Government was borrowing other 
sums."^ On April 12, Fort Sumter was fired upon and 

® Sherman, Recollections, i, p. 252. 

^ On this point, as on so many connected with this subject, 
there was difference of opinion among contemporary writers, the 
press being about equally divided. The New York Times urged 
the issuance of the entire sum in Treasury bills, as during the 
Mexican War (May 13, 1861). The action of Chase is defended 
among later writers by Nicholai and Hay {Life of Lincoln), by 
Shuckers {Life of Chase, p. 184), McCulloch {Men and Measures 
of Half a Century, p. 411), Bolles, {op. cit., iii, p. 9), and 
others. 

299 



WAR COSTS AND THEIR FINANCING 

war had now begun, an event which affected public 
credit unfavorably at the time. A second caU on 
May 11 for bids for $8,994,000 worth of bonds brought 
in offers for $7,310,000 at prices ranging from 85 to 93, 
and this amount of bonds was sold, the balance of 
$1,684,000 being issued in Treasury notes. A third 
invitation for proposals for $12,584,550 resulted in only 
three bids, aggregating $12,000, and these were '' made 
under misapprehension."® Accordingly, the whole 
amount was issued in Treasury notes. In addition to 
these resources, about $5,500,000 had been received from 
customs duties and small amounts from several other 
sources of revenue in the quarter ending June 30, but 
the fiscal year 1861 closed with a deficit of about 
$20,000,000. 

The financial outlook was certainly very discourag- 
ing. The tone of the European, and especially of the 
English press, which with a single exception was in 
sympathy with the rebellious states, showed that no 
money could be borrowed from Europe.^ Nor did this 
foreign hostility to the North cease until the war was 
ended. Wlien bonds could be had at bargain prices, 
some were sold to German capitalists, but on the whole 
it was clear that the people of the loyal states would 
have to assume the burden of financing the war them- 
selves. 

Congress convened in special session on July 4, 1861, 
and Chase now submitted his plan for the conduct of 
the war. This was a loan policy. Taxes w^re to be 
levied sufficient to pay interest on new debt and to 
establish a sinking fund, but all additional expenditures 
were to be met by loans or by the issue of Treasury 



® Bolles, op. cit., iii, p. 10. 
' McCulloch, op. cit., p. 183. 



300 



HOW SHOULD A WAR BE FINANCED 

notes. This policy was clearly outlined in his first war 
report :^^ 

To provide the large sums required for ordinary expendi- 
tures, and by the existing emergency, it is quite apparent that 
duties on imports, the chief resource for ordinary disburse- 
ments, will not be adequate. The deficiencies of revenue, 
whether from imports or other sources, must necessarily be 
supplied from loans and the problem to be solved is that 
of so proportioning the former to the latter, and so adjusting 
the details of both, that the whole amount needed may be 
obtained with certainty, with due economy, with the least 
possible inconvenience, and with the greatest possible inci- 
dental benefit to the people. 

The Secretary . . . is of the opinion that not less than 
eighty millions of dollars should be provided by taxation, and 
that two hundred and forty millions of dollars should be 
sought through loans. 

It will hardly be disputed that in every sound system of 
finance, adequate provision by taxation for the prompt dis- 
charge of all ordinary demands, for the punctual payment 
of the interest on loans, and for the creation of a gradually 
increasing fund for the redemption of the principal, is 
indispensable. Public credit can only be supported by 
public faith, and public faith can only be maintained by an 
economical, energetic and prudent administration of public 
affairs, by the prompt and punctual fulfillment of every 
public obligation. 



The slight role to be played by taxation in the plan 
is not sufficiently indicated by this statement. Out of 
the $318,519,582 estimated to be needed, one-quarter or 
$80,000,000, was to be raised by taxes. Of this, about 
$66,000,000 would be needed for the ordinary expendi- 

^° Report of the Secretary of the Treasury, July 5, 1861, 
Senate Executive Document No. 2, 37th Congress, 1st Session, 
p. 2. It is interesting to note that according to this plan one- 
fourth of the expenditures was to be met by taxation. 

301 



WAR COSTS AND THEIR FINANCING 

tures of the peace establishment;" $9,000,000 for the 
payment of interest ; and $5,000,000 for a sinking fund. 
Chase estimated that the existing customs duties would 
yield about $30,000,000 and that additional duties on 
tea and coffee, then admitted free, and on sugar, which 
was lightly taxed, and a slight increase on the general 
list of dutiable articles, would bring the total from this 
source up to $57,000,000.^2 g^^gg q^ public land and 
miscellaneous revenue might be counted on to increase 
this to $60,000,000. The remaining $20,000,000, he sug- 
gested, might be raised by ' ' direct taxes, or from inter- 
nal duties or excises, or from both," but he abstained 
from making a definite recommendation.^^ He also 
urged the confiscation of the property of rebels and 
retrenchment in expenditures by a 10 per cent, reduction 
upon salaries and wages paid by the Federal Govern- 
ment, the abolition of the franking privilege, and the 
reduction of postal expenses.^* 

Slight as was the resort to taxation recommended by 
Chase, Congress fell short even of his modest demands. 
The duties imposed 'upon coffee, tea, and sugar were 
lower than those urged by Chase^^ and the other changes 
in the tariff were unimportant. No steps were taken 
toward the establishment of an internal-revenue or excise 
system, which it will be remembered had not existed in 
the country since 1817, but a direct tax of $20,000,000 
and an income tax were imposed.^^ As the direct tax 

" That this estimate was rather low is sho^\^l by the fact that 
the average annual expenditures for the tive years ending June 
30, 1861, were $68,092,000, while for the 10 years past they 
were $61,488,700. 

"Report of the Secretary of the Treasury, July 5, 1861, Senate 
Executive Document No. 2, 37th Congress, 1st Session, p. 8. 

^'Ilid., p. 9. 

"7&id, p. 10. 

" " Report on the Finances," December 9, 1861, p. 10. 

"Act of August 5, 1861, 37th Congress, 1st Session; c.xlv. 

302 



HOW SHOULD A WAR BE FINANCED 

was apportioned among all the states, it was manifest 
that only that part of it falling upon the loyal states, 
to the amount of $14,846,018,^^ could be counted upon ; 
it was, moreover, not due for eight months. The income 
tax of three per cent, on incomes over $800 was not to 
become effective for 10 months. It was quite evident, 
therefore, from this legislation that it was the intention 
both of Chase and of Congress to finajice the war mainly 
by loans. It has been urged as an excuse for this policy 
that there was a general belief that the war would be 
over in a few months,^^ and there was also an unwilling- 
ness to create friction and opposition.^^ The diity of 
the Secretary of the Treasury in such a crisis, however, 
was to take measures that would place the Government 
on a sound financial footing if unhappily his optimism 
should prove to be unfounded. 

In the part of his July report relating to the raising 
of $240,000,000 by loans, Chase recommended that he be 
authorized to sell four kinds of securities: $100,000,000 
in three-year Treasury notes bearing interest at 7.30 
per cent., popularly known as ^ ' seven-thirties ' ' ; $100,- 
000,000 in 20-year bonds bearing interest at seven per 
cent.; and $50,000,000 in Treasury notes of small 
denomination, either bearing interest at 3.65 per cent, 
or payable on demand in coin. These latter were known 
as ^ ' demand notes. ' ' In making these recommendations 
he added the warning :^^ ^ ' The greatest care will, how- 
ever, be requisite to prevent a degradation of such issues 
into an irredeemable paper currency, than which no 

""Report on the Finances," 1861, p. 14. 

^^ " It is earnestly hoped, and, in the judgment of the Secretary, 
not without sufficient grounds, that the present war may be 
brought to an auspicious termination before midsummer." ("Re- 
port on the Finances," 1861, p. 21.) 

" Blaine, Twenty Years of Congress, i, p. 402. 

=^°" Report," December 9, 1861, p. 14. 

303 



WAR COSTS AND THEIR FINANCING 

more certainly fatal expedient for impoverishing the 
masses and discrediting the Government can well be 
devised." In spite of this condemnation of an irre- 
deemable paper currency, he was already laying the 
foundation for it by his loan policy. 

These recommendations were promptly enacted into 
law by Congress by the Act of July 17,^^ which added a 
fifth kind of security to the four suggested by Chase, 
namely, one-year six per cent. Treasury notes in amount 
not to exceed $20,000,000. No bonds were to be sold 
under par. On August 5, a supplemental bill was 
passed, which provided that part of the issue of 20-year 
bonds might be issued at six per cent, in exchange for 
seven-thirty Treasury notes; these bonds could be sold 
below par.^^ The sixth section of this Act suspended 
the Independent Treasury Act of 1846 to the extent of 
permitting the Secretary of the Treasury to make de^ 
posits with banks. 

After the batrle of Bull Run on July 21, 1861, the 
credit of the Government fell and a popular loan was 
out of the question. Chase hastened to New York City, 
where he had a conference with the leading bankers of 
New York, Boston, and Philadelphia, and arranged for 
a loan from them of $150,000,000. The banks were to 
receive seven-thirty Treasury notes at par and were to 
advance the money to the Government in three install- 
ments of $50,000,000 each. On the other hand, the 
Secretary was to negotiate no other bonds or Treasury 
notes except the demand notes, which were being used 
to pay salaries.^^ In his negotiation with the banks, 
Chase displayed a lack of understanding both of finance 

'^Act of July 17, 1861, 37tli Congress, 1st Session, c. v. 

"N. A. Bayley, National Loans of the United States, p. 78. 

^Bolles, op. cit., iii, p. 21. 

304 



HOW SHOULD A WAR BE FINANCED 

and of human nature. His own account of the interview 
is as follows :2* 

I was obliged to be very firm, and to say: "Gentlemen, 
1 am sure you wish to do all you can. I hope you will find 
that you can take the loans required on terms which can 
be admitted. If not, I must go back to Washington and 
issue notes for circulation; for, gentlemen, the war must 
go on until this rebellion is put down, if we have to put 
out paper until it takes $1,000 to buy a breakfast." 

Threats and coercion were certainly not the methods 
best adapted to secure the cooperation of the banking 
institutions. Chase did not seem to realize that in bor- 
rowing money the Government is essentially upon the 
same footing as individuals, except as it may appeal to 
patriotijsm. It certainly cannot safely resort to force. 
The banks accepted the decision of the Secretary and 
paid over their specie to the Government at the rate 
of about $5,000,000 a week. So large, however, were 
the disbursements of the Treasury and so rapid the 
movements of trade that the coin thus paid out was 
returned again to the banks for deposit in about a week 
All might yet have gone weH if Chase had not begun 
to issue demand notes again. This he had done in 
August, but because of the protest of the banks, had 
refrained while the proceeds of the loans were coming 
m; but now, finding himself in straits again, he resorted 
to their use very freely in November. As these were 
redeemable in coin, the banks were expected by their 
customers to receive them for deposit and then permit 
them to be drawn against in coin. In this way the coin 
reserves of the banks would be drained off by notes over 
the issue of which they could exerci se no control. 

'* A. B. Hart, Chase, p. 222. ' ' " 

305 



WAR COSTS AND TTTEIR FINANCING 

The banks liad met the first two payments to the Gov- 
ernment of August and October without difficulty. In 
spite of the fact that they had loaned $100,000,000, their 
coin reserve had fallen only $5,000,000, or from 
$63,200,000 on August 17 to $58,100,000 on December 7. 
On November 16 the third installment of the loan was 
called for, but the specie advanced by the banks did 
not return freely to them as it had in the first two 
cases, as the channels of trade were now choked by the 
demand notes. During the three weeks following Decem- 
ber 7 the New York banks lost $13,000,000 in specie. 
Depositors became frightened and began to withdraw 
funds for hoarding. In the circumstances there was no 
recourse but the suspension of specie payments, which 
was declared by the banks of the country on December 
30 and speedily followed by the Government. To this 
result the policy of the Secretary of the Treasury con- 
tributed largely, if, indeed, was not entirely responsible 
therefor. 

Chase's report of December, 1861, was a disappoint- 
ment and did nothing to avert the crisis; in fact it 
injured the credit of the Government. ^^ It was generally 
felt that the plan of borrowing from the banks and of 
issuing demand notes should be only a temporary make- 
shift until a permanent and vigorous policy of taxation 
could be matured. But Chase presented no such 
program in his report. He was forced to revise his 
estimates of the previous July as to tax revenues ; instead 
of the $80,000,000 anticipated, he now estimated only 
$55,000,000,26 a loss of $25,000,000, practically all of 
which was due to the falling off of customs duties. He 

^° W. C. Mitchell, in Journal of Political Economy, June, 1899. 
^® Eeport of the Secretary of the Treasury, December 9, 1861, 
p. 11. 

306 



HOW SHOULD A WAR BE FINANCED 

realized that duties on imports could not be relied upon 
as a source of revenue, and recommended that the rates 
on sugar, tea, and coffee be raised, but " that no other 
alterations of the tariff be made during the present 
session of Congress. ' '^^ He also urged that the direct 
tax be increased so as to raise $20,000,000 from the 
loyal states alone, and that the income tax be modified 
so as to yield $10,000,000. In addition to these he sug- 
gested for the first time the establishment of a system 
of internal duties to consist of taxes on stills and. dis- 
tilled liquors, on tobacco, on bank notes, on carriages, on 
legacies, on paper evidences of debt and instruments for 
conveyance of property, and other like subjects of taxa- 
tion ; from these sources he hoped to secure $20,000,000. 
Altogether he planned to raise by taxation for the fiscal 
year 1862 some $90,000,000, and for the fiscal year 1863 
some $95,000,000. The Secretary regretted that he must 
ask for such large sums but felt that they were barely 
sufficient " to meet even economized disbursements, and 
pay the interest on the public debt, and provide a sink- 
ing fund for the gradual reduction of its principal."^® 
There is here no evidence of the abandonment of the 
loan policy or of a vigorous resort to taxation. In fact, 
Chase takes pains to repeat *' the principles by which, 
as he conceives, the proportions of taxation and loans 
should be determined. "^'^ Taxes should meet the ordi- 
nary peace expenditures, interest on the debt, and a 
sinking fund, but all extraordinary expenses should be 
defrayed out of loans. ^' It will be seen at a glance," 
continues the report, '* that the amount to be derived 
from taxation forms but a small portion of the sums 

"JbiU, p. 14. 
''Ibid., p. 15. 
""Ibid., p. 13. 

307 



WAR COSTS AND THEIR FINANCING 

required for the expenses of the war. For the rest, 
reliance must be placed on loans. "^^ 

One reason for Chase's unwillingness to urge heavy- 
taxation was his belief that the people would not stand 
it. '' He has read history to little purpose," he wrote, 
'' who does not know that heavy taxes will excite dis- 
content." In this respect, however, he failed to realize 
the loyalty and willingness of the people to support a 
more vigorous policy. This is illustrated by the tone of 
various memorials presented to Congress by commercial 
and scientific associations, begging that more adequate 
taxes be imposed. The New York Chamber of Com- 
merce advocated that $214,000,000 be raised by excise 
taxes similar to those in vogue in England, and the 
American Geographical and Statistical Society urged 
the raising of $268,000,000 from internal revenue duties 
and $50,000,000 from customs.^^ 

Congress understood bettei- the magnitude of the 
struggle and the temper of the people, and instead of 
providing the $90,000,000 asked by Chase, passed a 
comprehensive internal revenue measure on July 1, 1862, 
which was estimated to produce an annual revenue of 
$150,000,000. So slow was it, however, in framing this 
Act that the year had slipped by before action was 
taken, and Chase was compelled in the interval to rely 
upon loans and upon issues of the new legal-tender 
notes. The full effects of the new Act were not felt 
until the fiscal year 1863-64, when it yielded 
$110,210,000. 

The guiding principle of this measure was '' the 
imposition of moderate duties upon a large number 
of objects, rather than heavy duties upon a few." It 

»" Ihid., p. 16. 
•^Jhid., p. 18, 

308 



HOW SHOULD A WAR BE FINANCED 

was levied upon luxuries, occupations, processes, evi- 
dences of wealth, income, and legacies. '' The one 
necessity of the situation,'' said D. A. Wells,^^ '' was 
revenue, and to obtain it speedily and in large amounts 
through taxation; the only principle recognized, if it 
can be called a principle, was akin to that recommended 
to the traditionary Irishman on his visit to Donnybrook 
Fair: * Whenever you see a head, hit it.' Whenever 
you find an article, a product, a trade, a profession, or 
a source of income, tax it." At the same time Congress 
revised the tariff so as to provide temporary compen- 
satory duties in the case of those articles upon which 
excise taxes were laid. 

In order to provide the necessary funds while 
these tax measures were getting under way, Congress 
had authorized a loan of $500,000,000 in six per cent, 
bonds redeemable at the pleasure of the Government 
after 5 years and payable after 20.^^ They were 
known as the ** five-twenties." They could be sold at 
the market value, the interest was made payable in gold, 
and the legal tenders could be funded into them. This 
last provision would have resulted in an automatic 
contraction of the greenbacks as these depreciated, 
but Chase recommended its repeal,^* which was done. 
Chase later admitted he had made two mistakes in the 
financial arrangements of the war: one, in consenting 
that the United States notes should be made legal ten- 
der ; the other, in advising the repeal of the clause which 
made the notes convertible into bonds.^^ One might 
lengthen the list of mistakes, but no one would disagree 
with Chase's own characterization of these two acts. 

'^ Cdbden Club Essavs, Second Series, p. 479. 
^^Act of February 25, 1862. 
'* " Report on the Finances," 1862, p. 25. 
^^McCulloch, op. cit., p. 186. 

309 



WAR COSTS AND THEIR FINANCING 

The loan act proved to be of little immediate assist- 
ance, for Chase interpreted the phrase ' ' market value ' * 
to mean par value, and refused to sell the bonds below 
par.^® As other securities bearing a greater rate of 
interest were on the market, no one would buy the five- 
twenties, and by December, 1862, only $23,750,000 had 
been sold. For his attitude on this point Chase may be 
sharply criticized, for by refusing to sell the bonds at 
their market value he was compelled to resort to further 
issues of legal-tender notes and to various makeshift 
devices. He was averse to the issue of long-time bonds^^ 
and made use of short-time and temporary loans of 
every conceivable character — certificates of deposit, 
certificates of indebtedness. Treasury notes, demand 
notes, etc. 

' ' The whole system of short loans was an unfortunate 
makeshift. Since it was impossible to foresee expenses a 
year ahead. Chase's budgets were all estimates. What 
he did was to raise all the money he could, in every pos- 
sible way; to refund his temporary loans into bonds, so 
far as he could, and then to resort to new short loans for 
pressing needs. When everything else failed he issued 
more legal tenders. "^^ But Chase was still firm in his 
advocacy of his loan policy. " The chief reliance, and 
the safest," he wrote in his annual report of 1862,^^ 
*' must be upon loans." The existing loan and legal- 
tender acts he thought had worked well and should be 

2" " Report on the Finances," 1862, p. 7. 

" " No prudent legislator at a time when the gold in the world 
is increasing by a hundred millions a year, and interest must 
necessarily soon decline, will consent to impose on the labor and 
business of the people a fixed interest of six per cent, on a great 
debt, for 20 years, unless the necessity is far more urgent than 
is now believed to exist." {Ihid., p. 25.) 

3«A, B. Hart, op. cit., p. 242. 

""Report on the Finances," 1862, p. 24. 

310 



HOW SHOULD A WAR BE FINANCED 

extended; he had no suggestions to make concerning 
further taxation."**^ 

When Congress met in December, 1862, it was con- 
fronted with a deficit of $276,900,000, together with 
unpaid requisitions amounting to $46,400,000. Accord^ 
ingly it authorized the third issue of legal-tender notes 
of $100,000,000 to provide for immediate needs,*^ while 
a new Loan Act*^ provided for $900,000,000 of six per 
cent, bonds redeemable after 10 and payable after 40 
years, and a variety of one-year, two-year, and com- 
pound interest notes. The National Bank Act was also 
passed.*^ Vigorous efforts were now made to sell the 
five-twenty bonds, but instead of applying to the banks. 
Chase decided to sell them directly to the people. An 
experienced banker. Jay Cooke, was employed as general 
agent, receiving a commission of three-eighths of one 
per cent, on all sales; he in turn employed 2,500 sub- 
agents throughout the country, which he flooded with 
literature setting forth the advantages of Government 
bonds as investments. By these energetic methods the 
sales were increased to nearly $400,000,000 by December, 
1863.** This method, however, was criticized and was 
not made use of by Chase in the negotiation of the next 
loan.*^ 

In his report for December, 1863, Chase estimated the 
tax receipts for the fiscal year ending June 30, 1864, at 
$161,568,500, leaving $594,000,000 to be provided by 
loans.*^ The internal revenue receipts had proved very 
disappointing, amounting to only $38,000,000, instead 
'*mid., p 10. 

"Act of January 17, 1863. 

"Act of March 3, 1863. 

"Act of February 25, 1863. 

** " Report on the Finances," 1863, p. 14. 

" David Kinley, Independent Treasury, p. 106. 

""Report on the Finances," 1863, p. 5. 

311 



WAR COSTS AND THEIR FINANCING 

of $85,000,000 as estimated, and in these some changes 
were suggested. It is interesting to note in this report 
the first intimation that the loan policy was not proving 
entirely satisfactory. One or two short quotations will 
make this point clear :*^ 

No one can be more profoundly convinced than himself 
[he wrote] of the very great importance of providing even 
a larger amount than is estimated from revenue. To check 
the increase of debt must be, in our circumstances, a 
paramount object of patriotic solicitude. The Secretary, 
therefore, while submitting estimates which require large 
loans, and while he thinks it not very difficult to negotiate 
them, feels himself bound, by a prudent regard to possible 
contingencies, to urge upon Congress efficient measures for 
the increase of revenue. . . . 

Hitherto the expenses of the war have been defrayed by 
loans to an extent which nothing but the expectation of its 
speedy termination could fully warrant. . . . 

These statements [estimates of receipts and expenditures] 
illustrate the great importance of providing, beyond all con- 
tingencies, for ordinary expenditures and interest on debt, 
and for the largest possible amount of extraordinary expendi- 
tures by taxation. In proportion to the amount raised above 
the necessary sums for ordinary demands will be the diminu- 
tion of debt, the diminution of interest, and the improvement 
of credit. It is hardly too much — perhaps hardly enough — 
to say that every dollar raised for extraordinary expenditures 
or reduction of debt is worth two in the increased value of 
national securities, and increased facilities for the negotiation 
of indispensable loans. 

Had Chase realized and acted upon this truth two years 

earlier many of the monetary and financial troubles in 

our later financial history might have been avoided.^^ 

"Ibid., pp. 9, 10, 12. 

*' Cf. H. C. Adams, PvUic Belts, p. 130. 

312 



HOW SHOULD A WAR BE FINANCED 

By this time Congress, too, had come to realize the 
essential weakness of the loan policy and directed its 
energies to providing larger revenues from taxation. 
The great tax bills of the war were tITose passed in 
June, 1864, which provided for drastic increases in the 
internal revenue taxes. The revenue from this source, 
which was $110,210,000 for the fiscal year 1864, was 
thus increased to $210,660,000 in 1865 and $311,200,000 
in 1866.^^ 

In order to meet the immediate needs of the Treasury, 
Congress had authorized by Act of March 3, 1864, an 
issue of $200,000,000 of bonds bearing interest at not 
over six per cent, and redeemable in 10 to 40 years. 
These were popularly known as the ' ' ten-forties. ' ' For 
some unaccountable reason Chase decided to issue these 
bonds at five per cent, interest, though the five-twenties 
bore six per cent, and were selling at a price to yield 
5.4 per cent.^^ The result was disastrous, and bond 
buying nearly ceased, only $73,337,000 of the ten-forties 
being sold up to June 30, 1864. Expenditures, however, 
were increasing rapidly, and Chase was consequently 
forced to resort once more to short-time loans. He issued 
one-year and two-year notes, compound interest notes, 
and certificates of indebtedness. Some of these went 
into circulation and others were absorbed by the banks 
for reserves, displacing to this extent greenbacks. In 
either case the currency was inflated and prices raised. 
By some writers it has even been charged that Chase 
inflated the currency purposely so that he could market 
the ten-forties at par and not be compelled to acknowl- 
edge that he had made a mistake. His own words on this 

*° F. C. Howe, Taxation and Taxes in the United States under 
the Internal Revenue System, 1791-1895, p. 69. 

"" Hunt's Merchants* Magazine and Commercial Review, li 
(1864), p. 43. 

318 



WAR COSTS AND THEIR FINANCING . 

matter were as follows :^^ ' ' The bonds do not seem to be 
readily taken as yet by the people. It required the 
printing and paying out of $400,000,000 of greenbacks 
before the five-twenty six per cent, bonds could be 
floated easilj^ a,t par, and it will probably require the 
circulating issues of the Government, now amounting to 
about $625,000,000, to be increased to $650,000,000 or 
$700,000,000 before the people will be induced to take 
five per cent, bonds. ' ' Whether this allegation is correct 
or not, there is no doubt that this was Chase 's crowning 
mistake, and possibly the one most costly to the country. 
Chase resigned as Secretary of the Treasury on June 29, 
1864, for political reasons. 

It is not necessary to trace the further course of Civil 
War financing. Under W. P. Fessenden and Hugh 
McCuUoch a more vigorous policy of taxation was 
enforced, and this, coupled with military victories, had 
a beneficial effect upon the national finances.^^ The 
lessons to be derived from this brief study of our past 
experience may be briefly summarized as follows : 

(1) The fundamental error of our Civil War finance 
was the dependence upon loans for all extraordinary 
expenditures. 

(2) Resulting from this in large measure was the 
issue of legal-tender notes. 

(3) The undue use of short term loans, amounting 
to 85 per cent, of all loans in the first year, and 60 per 
cent, for the four years of the war, tended to embarrass 
each subsequent operation. 

"^ Quoted by D. R. Dewey, Financial History of the United 
States, p. 279. 

^^The ratio of taxes to loans, which had been 1:8.5 in the fiscal 
year June 30, 1862, was reduced to 1:3.5 in the second year of 
the war, to 1:3.4 in the third, and finally to 1:2.9 in the fourth 
year ending June 30, 1865. (C. J. Bullock, " Financing the War," 
in Quarterly Journal of Economics, xxxi, p. 363.) 

314 



HOW SHOULD A WAR BE FINANCED 

(4) The attempt to issue the ten-forties at a rate of 
interest lower than the market. 

^' It appears, then," concludes H. C. Adams,^^ an able 
critic of our financial history, '^ that the history of the 
war of 1861 . . . bears direct testimony against the 
sufficiency of the loan policy." 

It may be said in passing that the financing of the 
Spanish War in 1898 offers a refreshing contrast to the 
policy followed in all similar emergencies up to that 
time. While a loan of $200,000,000 was authorized for 
immediate needs, new internal revenue taxes were also 
imposed by the same Act, which a year later were 
bringing in additional revenues of $100,000,000.^* Here 
we have presented the correct policy for the financial 
management of a war which, as 11. C. Adams^^ says, 
should be '' a tax policy assisted by credits rather than 
a credit policy assisted by taxes." 

The lesson of the Civil War has an immediate prac- 
tical bearing in the present study, for the same two 
inquiries may be raised regarding the financing of the 
World War. What was the proper proportion between 
loans and taxes, and, after the determination of this 
question, were the funds raised in the best manner 
by the method chosen? 

There can be no doubt as to the financial policy that 
was pursued by all the belligerents except Great Britain 
and the United States. It must be characterized as an 
exclusive loan policy, in which not enough was raised 
by revenues to meet the normal budget and the interest 
charges on the debt. Loans were even used to pay the 
interest on earlier borrowings. Heavier taxes were 

^^ Public Debts, p. 133. ' " 

" " Report on tl\e Fmances," 1900, p. 44. 
" Science of Finance, p. 542. 

315 



WAR COSTS AND THEIR FINANCING 

levied, to be sure, but in no case except in the two 
countries named did these increase rapidly enough to 
meet the growing charges of the debt service and the 
ordinary budget, let alone make any contribution to 
meeting the costs of the war. Neither France, Russia, 
Italy, Germany, or Austria-Hungary of the major 
belligerents, nor Belgium, Serbia, Rumania, Bulgaria, 
or Turkey of the minor belligerents was able to pay a 
single penny toward war expenditures out of taxes. 
Compared with such a record the inadequacy of Chase's 
loan policy seems less reprehensible. The statistical 
facts in support of these statements are given for the 
six leading European belligerents in the table following. 

After such a presentation the question as to 
whether the European belligerents should have pur- 
sued a ' ' tax policy assisted . by credits ' ' raiher 
than a loan policy may appear merely academic. 
In the case of Great Britain alone were the efforts 
to raise by taxation a part of the costs of the war 
vigorous and sustained. On the part of the Conti- 
nental nations the feeling seemed to be general that the 
war itself constituted a sufficient burden without adding 
that of taxation. Germany, as has been pointed out, 
followed a deliberate and premeditated policy in her 
exclusive reliance upon loans to meet the costs of the 
war; when she finally began, in the third year of the 
war, to increase the taxes somewhat, it was too late, and 
she was hardly able to raise enough even to meet the 
interest charges on the debt, to say nothing of the 
civil budget. A discussion of financial policy, there- 
fore, seems to resolve itself into the question of which 
was better, the British- American policy on the one hand, 
or that of the European Governments on the other. 

Judged by the results, which is the ultimate touch- 
316 



HOW SHOULD A WAR BE FINANCED 



Table Showing the Inabiijty of European Taxation to Meet 
THE Civil Budget and Interest Charges 



Fiscal Year 



Interest charges \ Total revenues 



great BRITAIN 




1915 


$113,344,480 

301,246,555 

636,252,470 

949,255,300 

1,332,668,000 


$1,133,470,000 


1916 


1,683,835,000 


1917 


2,867,140,000 


1918 


3,536,175,000 


1919 


4,445,105,000 






Total 


$3,332,766,805 


$13,665,725,000 


Five years' civil budget (1914, 


$987,464,845).... 


4,937,324,225 


Surplus revenue over pre-war normal expenditure 
Five years' interest charges 


$8,728,401,775 
3,332,766,805 






Surplus revenues over norma 
interest 


1 expenditure and 


$5,395,634,970 



FRANCE 



1914 


$273,242,000 

379,879,000 

666,603,000 

972,677,000 

1,113,570,000 


$796,821,386 


1915 


776,794,297 


1916 


963,286,447 


1917 


1,231,200,000 


1918 


1,326,800,000 






Total 


$3,405,971,000 


$5,126,902,130 


Five years' civil budget (1913, 


$1,013,386,240)... 


5,066,931,200 


Surplus revenue over pre-war normal expenditure 
Five years' interest charges 


$59,970,930 
3,405,971,000 






Deficit 




$3,346,000,070 











RUSSIA 




1914 


$226,449,000 
240,000,000 
298,866,000 
371,209,000 


$1,449,000,000 


1915 


1,397,000,000 


1916 


1,457,000,000 


1917 


1,870,000,000 












Total 


$1,136,524,000 


$6,173,000,000 


Four years' civil bi 


idget (191 
to meet 


3, 


$1,547,124,000).. 


6,188,496,000 


Deficit of revenue 
penditure 


pre-war normal ex- 


$15,496,000 


Plus interest 


1 , 136 , 524 , 000 












Total deficit 






$1,142,020,000 



317 



WAR COSTS AND THEIR FINANCING 



Budgets op Principal European Nations — Continued. 



Fiscal Year 



I Interest charges 1 Total 



1915 


$109,998,237 
174,258,691 
254,818,892 
382,022,327 
577,000,000 


$609,340,114 


1916 


601,405,400 


1917 


761,000 000 


1918 


929,000,000 


1919 


971,000,000 






Total 


$1,498,038,147 


$3,871,745,514 


Five years' civil budget (1914, 


$632,046,000).... 


3,160,230,000 


Surplus revenue over pre-war normal expenditure 
Five years' interest charges 


$711,515,514 

1,498,098,147 






Deficit 




$786,582,633 



GERMANY 



1915. 
1916. 
1917. 
1918. 
1919. 



$317,000,000 

575,000,000 

890,250,000 

1,467,750,000 

1,975,000,000 



Total $5,225,000,000 

Five years' normal civil budget (1914, $851,- 
294,600) 



Surplus revenue over pre-war normal expenditure 
Interest charges as above 



Deficit on basis of estimated revenues. 



$851,294,375 

829,270,125 

970,729,732 

1,116,134,367 

1,533,824,194 



$5,301,253,193 
4,256,463,000 



$1,044,790,193 
5,225,000,000 



$4,180,209,807 



AUSTRIA-HUNGARY 



1915 


$1,144,976,400 


1916 


1,042,847,600 


1917 


1,313,528,600 


1918 


1,732,596,400 






Total . 


$5,233,949,000 


Four years' civil budget, 1913: 

Austria $625,811,000 

Hungary 444,360,000 




$1,060,171,000 


4,240,684,000 


Surplus revenue over pre-war normal expenditure 
Four years' interest charges (estimated) 


$993,265,000 
1,394,000,000 


Deficit 


$400,735,000 



318 



HOW SHOULD A WAR BE FINAiNCED 

stone, the matter does not seem open to doiJbt. An 
exclusive loan policy might be permissible in Va short 
and victorious struggle, especially when an inde'^ninity 
was collected to meet the costs, but no financier t^as a 
right to make the success of financial measures c on- 
tingent upon military strategy. The only safe plan is 
to prepare for a long struggle, or at least to adopt a" 
plan that can be modified to meet new conditions as 
they develop. It may safely be asserted that the 
finances of the European Entente Allies would have 
broken down completely had it not been for the timely 
aid rendered by the United States, and that the utter 
financial collapse of the Central Powers was~a powerful 
factor in their final defeat. The shortsightedness and 
inadequacy of the exclusive loan policy is sufficiently 
evidenced by these facts, and it does not seem necessary 
to pursue this phase of the inquiry further. 

In Great Britain and the United States, however, 
there was a very lively controversy as to the proportion 
in which loans and taxes should be made to contribute 
to the costs of the war. Although there were a few 
extremists who advocated a taxation-only or loan-only 
program, neither of these extreme policies found any 
serious support. In fact, in view of the gigantic 
expenditures of the war, it is hardly correct to say that 
there was a choice between these two. It was necessary 
at the outset to make use of credit on a hitherto unknown 
scale. But at the same time, in accordance with the most 
approved financial practice of providing a sound basis 
for public credit, the scope of taxation was greatly 
exti^nded. Both means of providing the necessary 
revenues were used. The only question open to discus- 
sion was that of the proportion in which loans and taxes 
should be employed. As a matter of fact, revenues 

319 



WAR COSTS AND THEIR FINANCING 

provided about one-fourth of the receipts in Great 
Britain and about one-third in the United States. Was 
this enough, or should a still higher proportion have 
t>een secured from taxation? Without attempting to 
gi^'e a categorical answer to these questions, it will suffice 
to state brieflj^ some of the arguments for and against 
a heavier taxation policy. 

The arguments used in defense of a large use of loans 
were of two kinds, positive, consisting of advantages 
accruing from the issuance of loans, and negative, con- 
sisting of evils arising from the imposition of too heavy- 
taxes. Perhaps the foremost argument in favor of loans, 
implicit if not always expressed, was that this method 
works; the machinery has been well developed, loans 
cause little resentment, are more easily obtained than an 
equal amount of taxes, yield large sums with a minimum 
of delay, and are almost indefinitely expansible. 

It was also urged that since posterity will share the 
benefits of the war, it should also bear some of the 
burdens. Without discussing at this time^^ the question 
as to whether a nation can shift to future generations 
the costs of the war, it may be pointed out that if the 
loans can be placed abroad such a shifting may 
undoubtedly be effected by the borrowing nation. But 
if all the loans are domestic, it is impossible for the 
nation as a whole to shift the burden. There is no 
difference in effect if the Government takes savings of 
$1,000 by taxation or borrows it at 'Q.Y'e per cent, and 
then adds five per cent, in taxes, assuming that the 
added taxes fall upon the bondholders. 

This, however, does not always prove true, and in 
this fact, it was said, is found another reason why loans 
are favored by those who determine the policy and 

^ '« See Chapter XI. ' 

320 



HOW SHOULD A WAR BE FINANCED 

advance the major portion of the funds. If the taxes 
to meet interest charges and redeem the principal fall 
upon the bondholders in exact proportion to their hold- 
ings, it can make no real difference to them whether 
they advance the money to the Government in the first 
place in the form of a loan or as taxes. But the 
incidence of the taxes levied to amortize the loans is 
seldom so exact. '' Experience has never yet revealed 
a tax system anything like as strongly graduated for 
increasing incomes as loan subscriptions are normally 
found to be, at all events when the loan required is 
large. Hence the rich think rightly that a loan hits 
them much less severely than an equivalent levy would 
do."^^ 

To the bondliolder, however, there is an advantage in 
buying a bond, even though his future taxes may be 
higher, over selling securities and paying a lump sum in 
taxation, for the bond is collateral and may be used for 
borrowing at a bank. But this so-called advantage is 
a two-edged sword, for by the advocate of a heavy 
taxation policy it is cited as a disadvantage since it 
leads to inflation. 

The advocates of a loan policy have, on the whole, 
devoted most attention to attacking the proposals for 
heavier taxation. Of the many objections to that pro- 
gram perhaps the one entitled to most serious con- 
sideration was the contention that too heavy taxation 
would impair the incentive to effort. As the main 
consideration in war is the stimulation of the production 
of war necessities, and this is secured under our price 
and profit system by allowing generous rewards to the 
producers, financiers hesitate to impose tax burdens that 

" A. C. Pigou, " The Burden of War and Future Generations," 
in Quarterly Journal of Economics, February, 1919, p. 248. 

321 



WAR COSTS AND THEIR FINANCING 

may tend to lessen production. They prefer to " play 
safe." Moreover, a sudden imposition of very heavy 
taxes seriously dislocates existing arrangements, pre- 
vents the meeting of commitments already made, and 
forces the abandonment of contracts. 

In addition to these main arguments, but distinctly 
subordinate to them, the following objections were made : 
Heavy taxation will deplete the surplus available for 
investment ; will cause popular resentment ; will diminish 
the funds available for charity, education, and similar 
purposes; will lead to the expatriation of capital or its 
withdrawal from productive use; and, finally, such a 
program is a new and radical departure. 

Turning now to the arguments of those who advocated 
a policy of immediate and vigorous taxation in order to 
raise from this source a considerable portion of the 
current costs of the war, it is found that they run the 
gamut from proposals to pay the entire cost by taxes, 
or to conscript all incomes over $100,000, to an insistence 
upon a " reasonably " heavy policy of taxation. Here 
again the arguments were two-fold, positive, in the 
advocacy of taxation, and negative, in attacks upon the 
loan policy. 

In favor of the immediate imposition of heavy taxes 
that should ' ' cut to the bone ' ' it was urged that such a 
policy will check undesirable consumption; if properly 
framed it will discourage extravagance and the pro- 
duction of nonessentials, compel economy, and drive 
out labor from undesirable industries. As an immedi- 
ate and complete mobilization of the human and material 
resources of a country is essential to the successful 
prosecution of war, a policy of hea^y taxation is desir- 
able not only for the saJke of revenue but also as a war 
measure. 

322 



HOW SHOULD A WAR BE FINANCED 

Moreover, a program of heavy taxation can best be 
introduced at the beginning of a war, when the demand 
for new capital investment has fallen off as the result 
of the curtailment of normal productive industry, and 
when, on the other hand, the immense gains from war 
contracts and similar activities tend to make the burden 
relatively less. Translating these abstract considerations 
into a concrete tax program, the advocates of heavy 
taxation approved of highly progressive income and 
estate taxes, excess and war profits taxes running as 
high as 80 and 90 per cent., and heavy consumption or 
excise taxes upon all nonessentials. 

It was against an excessive loan policy, however, that 
the advocates of vigorous taxation directed most of their 
attacks. The major danger was recognized as inflation, 
and this aspect of the situation received most attention. 
Said A. C. Miller of the Federal Reserve Board :^^ 

The danger of the loan policy is that by deluding itself 
with a notion that it is putting the burden onto the future 
it wall, through resort to fatuous and easy expedients, put 
the burden both on the present and the future. This will 
happen if the loan policy, failing to induce a commensurate 
increase in the savings fund of the nation, degenerates 
through the abuse of banking credit, into inflation — raising 
prices against the great body of consumers as well as against 
the Government, thus needlessly augmenting the public debt 
and increasing the cost of living just as taxes would. The 
policy of financing war by loans, therefore, will be but a 
fragile and deceptive and costly support unless every dollar 
obtained by the Government is matched by a dollar of 
spending power relinquished by the community — in other 
words, will fail and will develop into inflation unless the 
dollars which are subscribed to the bonds of the Government 
are real dollars, the result of real savings and of real 
retrenchment. 

58 " War Finance and the Federal Reserve Banks," in Financial 
MoJ) nidation for War, p. 145. 

323 



WAR COSTS AND THEIR FINANCING 

There were many who denied that the loan policy of 
the belligerents was responsible for the inflation and 
high prices that have accompanied the war; these were 
due, they said, to the increase of money, to scarcity of 
goods, or to other causes. It may be admitted that if 
private expenditures were cut down by an amount equal 
to the bonds issued for war purposes, there would be no 
inflation; that if the total amount of bank credit in 
existence were not increased, that used for the payment 
of bonds being offset by equivalent economies on the 
part of the public, there would result no inflationary 
effects. But this is to suppose what did not happen. 
The expenditures financed by the issue of bonds in fact 
represented an addition, and were taken up by the 
creation of bank credit which represented an addition, 
to normal transactions. 

As a result of inflation, it was further argued, the 
Government competed with its citizens for supplies, 
prices were raised, the purchasing power of each 
successive issue of bonds was reduced, extravagance was 
invited, variations in incomes were caused, much 
unnecessary hardship was brought about, and the cost 
of the war was increased. It has been estimated that the 
cost of the Civil War was enhanced by $600,000,000 
because of the issue of greenbacks. The cost of 
the World War must have been augmented by billions 
of dollars as a result of the inflation in the form both 
of bank notes and bank credit which has accompanied 
the enormous issues of bonds. 

Finally, it was urged that an undue dependence upon 
loans complicates after-war problems ; if war costs were 
paid out of taxes, there would be no such difficulties; 
that bonds are rarely bought from voluntary savings; 
that these must be enforced by heavy taxation; that a 

324 



HOW SHOULD A WAR BE FINANCED 

loan policy simply represents the mortgage of the masses 
to the classes, as the future taxes to redeem the bonds 
will almost certainly fall relatively more heavily upon 
the former. 

The conclusion to be drawn from these opposing 
counsels seems to be that loans and taxes are both neces- 
sary; that the best system is the one that secures the 
funds from savings rather than from bank borrowings ; 
that this is better secured by taxation than by loans; 
and finally, that the actual practice of the European 
belligerents was distinctly inflationary and inadequate. 
The policy of this country was to finance the war as far 
as seemed practicable by increased taxation and to raise 
the rest of the needed funds by loans. Larger sums 
could undoubtedly have been raised by heavier taxation, 
and changes in particular taxes might have been made 
with advantage, but conceived as a war-finance policy, 
that of the United States must, on the whole, be com- 
mended. The weakness lay in the enormous sums that 
had to be raised by means of loans and the methods 
pursued in securing these sums, with the attendant infla- 
tion of bank credit and rise in prices. In view of the 
fact that the expenditures far outran the customary 
annual savings of the people, it would have been impos- 
sible under any system to have paid for the war out of 
current savings. The best system, therefore, was that 
which would promote the maximum amount of saving 
on the part of the people while at the same time it 
developed the greatest possible military and economic 
effort toward winning the war. This end was well 
achieved in the United States.^^ 

^° For a fuller diBCussion of this latter point, see an article by 
the writer, " Economic Organization for War," in the American 
Political Science Review, November, 1920. 

325 



CHAPTEE XI 

FINANCING EUROPE AFTER THE WAR 

Foreign trade of the United States as a belligerent — Exports 
and imports by regions — The balance of trade — Europe's 
need for capital — Greatest supplies to be found in the 
United States — How can this be made available — Machinery 
by which loans can be advanced to Europe — Proposals for 
the extension of short time credit — Long term credit — Con- 
clusions. 

After the entry of the United States into the war, her 
foreign trade was increasingly regulated and controlled 
for the single purpose of making it contribute to the 
winning of the war. Imports were restricted to com- 
modities that were needed for war purposes, either on 
our own or on our allies' account. Because of the 
shortage of shipping they were taken for the most part 
from the nearest available market. Exports to non- 
belligerent countries, moreover, were cut down to the 
very minimum. Their shipment to any particular 
country was determined by the necessity of paying for 
goods purchased from that country or of securing to 
a friendly neutral the minimum necessary for it to 
maintain its customary economic activities, and towards 
the end of the struggle by the necessity of exerting a 
favorable influence upon the exchange situation. All 
the supplies and all the available tonnage that could be 
spared from domestic use and from the most pressing 
needs of neutral countries were diverted to the service of 
the Allies and our own army in Europe. 

There was done in the World War what probably was 
never accomplished before : The foreign trade of whole 

326 



FINANCING EUROPE AFTER THE WAR 

nations was used as a huge economic weapon against 
enemy countries and was diverted hither and yon as 
to serve best the Allied cause. It is not possible to 
describe the financing of the war without taking account 
of the way in which foreign trade was made to con- 
tribute directly to the success of our arms. The pay- 
ment of money and the use of credit constituted, after 
all, only the machinery by which the title to goods and 
services was transferred. The basic fact was the move- 
ment of ships and supplies, of food and men as 
expeditiously and in as large volume as possible to 
points where they were needed. How successful this 
movement was is indicated roughly by the statistics of 
our foreign trade, and yet these by no means measure 
the whole service, for they do not include the shipments 
on Government account to the American Expeditionary 
Force abroad. 

Because of our enormous sales to belligerent Europe, 
our exports showed a steady growth during the war, 
reaching a climax in the year ending June 30, 1917, 
when they reached the stupendous total of $6,290,048,- 
394. During the next year there was a slight decline, 
to $5,919,711,371, but a new high record of- exports 
was set for 12 months ending June 30, 1919, with a 
total of $7,225,084,257. The imports showed a similar 
movement except that the maximum was reached in 
1918. Both of these records, however, were far sur- 
passed by the unprecedented exports and imports for 
1920. As the latter increased more than the former, 
the excess of exports over imports was considerably 
reduced below that of the previous year. The following 
table shows the actual figures for the four years, 1917 
to 1920, together with the resulting favorable balance of 
trade : 

327 



WAR COSTS AND THEIR FINANCING 



Exports, Lmports, and Balance of Trade, 1917-1920 



Year ending 
June 30 


Total 
exports 


Total 
imports 


Excess of exports 
over imports 


1917 


$6,290,048,394 
5,919,711,371 

7,225,084,257 
8,111,176,131 


$2,659,355,185 
2,945,655,403 
3,095,876,582 
5,238,746,580 


$3,630,693,209 


1918 


2,974,055,968 


1910 


4,129,207,675 


1920 


2,872,429,551 



Owing to the depreciation of money wliicli was taking 
place, this growth in the value of foreign trade is con- 
fusing and may easily lead to false conclusions. The 
increase in the value of domestic exports during 1918 
was 150 per cent, over that of 1914, the last pre-war 
year, but if the values of 1918 be reduced to the pre- 
war 'standard, the actual increase is found to be only 
35.5 per cent.^ The total figures, however, do not tell 
the story. It is necessary to analyze them still further 
and to classify our foreign trade by groups of countries. 
This is attempted in the following table : 

Domestic Exports from the United States by Geographical 
Divisions 

(In millions^ 





1914 


1915 


1916 


1917 


1918 


1919 


Europe: 

Mied 

Enemy 

Neutral 


$ 922.7 
367.0 
181.5 


$1,544.8 

30.0 

369.5 


$2,666.1 

.5 

305.7 


$3,929.4 
2.2 

392.9 


$3,605.6 

0.3 

126.3 


$4,131.0 

28.2 

475.6 


Total. .... 
North America. 
South America . 
Asia 


$1,471.2 

509.9 

124.0 

113.1 

83.3 

27.8 


$1,944.3 

455.2 

97.5 

113.2 

77.4 
28.4 


$2,972.3 

702.7 

177.6 

277.8 

98.2 

43.4 


$4,324.5 

1,163.8 

259.5 

380.2 

109.3 

52.7 


$3,732.2 

1,236.4 

314.5 

447.4 

134.9 

54.3 


$4,634.8 

1,291.9 

400.9 

603.9 


Oceania 

Africa 


208.4 

85.2 


Total 


$2,329.7l$2.716.2 


$4,272.2 


$6,290.o' $5,919.7 


$7,225.1 



1 This calculation was made by assuming a price index number 
of 185 for 1918, as compared with 100 for 1914. 

328 



FINANCING EUROPE AFTER THE WAR 

It is clear from this table that the increase in domestic 
exports from the United States was due in large 
measure to the growth of our trade with belligerent 
Europe. Two-thirds of the increase that took place in 
the period 1914 to 1918 went to that section of the world. 
Between these two years the trade with the neutral 
countries of Europe, from which it was feared that 
Germany would be able to draw supplies, actually 
declined some 30 per cent. The growth of exports to 
other countries was due largely to the fact of the with- 
drawal of European belligerents from their customary 
trade, which left to this country the obligation of fur- 
nishing them with their needed supplies. If values were 
reduced to the 1914 basis for the year 1918, there would 
be recorded in most cases, not an increase, but an actual 
falling off in trade. 

The following table shows the imports into the United 
States from the principal regions of the world: 



Imports Into the United States by Geographical Divisions 

{In millions) 





1914 


1915 


1916 


1917 


1918 


1919 


Europe 

North America. 
South America . 
Asia 


$895.6 

427.4 

222.7 

286.9 

42.1 

19.1 


$614.3 

473.1 

261.5 

247.8 

52.5 

24.9 


$616.2 

591.9 

391.5 

437.2 

96.2 

64.7 


$610.5 

766.1 

542.2 

615.2 

65.3 

60.0 


$411.6 
918.3 
567.4 
826.2 
146.2 
75.9 


$372.9 
1,052.6 

568.4 
830.9 


Oceania 

Africa 


190.0 
81.1 






Total 


$1,893.9 


$1,674.2 


$2,197.9 


$2,659.3 


$2,945.6 


$3,095.9 



The significant feature of the import statistics is the 
great falling off in imports from Europe. After the 

329 



WAR COSTS AND THEIR FINANCING 

tightening of the British blockade, and especially after 
the entry of the United States into the war, shipments 
from the enemy powers ceased almost entirely, while 
those from the European Allies shrank to almost half 
of their pre-war amounts, owing to the absorption of 
industry in war activities and the consequent decline 
in exportable surplus. 

It has already been pointed out (Chapter III) that 
as a result of the enormous sales of our commodities to 
Europe, by means of which we had bought back Ameri- 
can securities held abroad, the United States had reached 
the position of creditor nation by the middle of the year 
1917. Since that time, however, still larger trade 
balances have piled up. Europe and the rest of the 
world have now become debtor to the United States 
to an amount which has been estimated at about 
$9,000,000,000. The annual interest charge on this sum 
will amount to about $450,000,000. As a result of the 
upbuilding of our merchant marine, the sums that were 
previously paid to foreign shipowners for freight 
service will be saved. Assuming that other charges, 
such as tourists' expenses abroad, remittances of emi- 
grants, commissions and insurance charges, and similar 
items, remain at the same level as they were before the 
war, though it is altogether probable that they will be 
lessened, the net result of the changes will be that 
instead of the United States being under the necessity 
of remitting annually to Europe some $500,000,000 to 
meet these various charges, we shall ourselves be in 
receipt of perhaps $200,000,000 to $300,000,000 a year. 
The United States is in fact at the present moment a 
creditor nation to this extent, and only the abnormal 
economic situation in Europe could prevent the full 
effects of this change from being felt. Any further 

330 



FINANCING EUROPE AFTER THE WAR 

movement of trade balances in favor of the United 
States will still further increase the amount due annu- 
ally from other countries. 

If this balance were sent us at the present time, it 
would create an embarrassing situation in the United 
States, for it is desirable to maintain our exports at 
the present level in order to provide employment for the 
demobilized soldiers and to take up the slack of the 
after-war period. Most of the European countries, how- 
ever, are talking steps to reduce their imports to the 
lowest possible level, so as to assist the revival of their 
own domestic industries, as well as to correct the 
unfavorable rates of exchange which are handicapping 
them in their purchase of needed supplies. Practically 
every country has prohibited the importation of luxuries 
and is limiting its other purchases to raw materials and 
machinery and equipment. But it will be necessary for 
Europe to continue to purchase from the United States 
during the next few years large quantities of foodstuffs 
and cotton, lumber, hides, copper, petroleum, and some 
coal, and also manufactured goods such as railroad 
equipment, agricultural machinery, and some consum- 
able commodities. 

In return for these purchases it is unlikely that 
Europe w^ill be able to export any considerable amount 
of merchandise or goods. Some increase of exports of 
raw materials or semimanufactured articles may be 
expected from some of the European countries, and a 
not inconsiderable part of their indebtedness may be 
canceled by an increase of our imports of jute and tea 
from India, of tin and rubber from the Straits Settle- 
ments, of coffee from Java, of wool from Australia, and 
of other articles from the dependencies of European 
nations, the value of which might be set against our 

331 



WAR COSTS AND THEIR FINANCING 

claims upon those nations themselves. There is a limit, 
however, to the amount of such commodities that can be 
spared by Europe or absorbed by our own industries or 
people. For the immediate future the United States 
must content itself with further promises to pay in the 
future in the form of securities of one sort or another. 

Ultimately the balance in our favor will have to be 
liquidated by larger imports of goods. By some this is 
regarded as a wholly undesirable outcome, and the fear 
is expressed that American workmen will to that extent 
be deprived of an opportunity to work. The fear is an 
idle one. The large so-called favorable balances of trade 
of the two years following the entry of the United 
States into the war were to some extent at least the 
result of self-denial on the part of the American people. 
We denied ourselves luxuries and comforts and volun- 
tarily imposed restrictions upon our consumption of 
certain foodstuffs in order that these or other supplies 
might be furnished the Allies in Europe. It is quite 
clear that this program should be continued and that 
the next few years must be marked by a lower stand- 
ard of comfort than would be necessary if we are to 
attempt to help supply Europe with consumable goods 
for immediate use and with capital for reconstruction 
purposes. When this period of abstinence shall have 
ended, it will surely not be a matter of regret if we shall 
begin to collect some of the debt owing us in the form 
of larger imports of commodities. The national income 
of the American people will then be increased bej^ond 
the amount of their own production by the excess of the 
merchandise imports over exports. 

For the immediate present, however, the United 
States, instead of collecting the sums due, is under the 
necessity of advancing still further amounts to aid in 

332 



WAR COSTS AND THEIR FINANCING 

the rehabilitation and reconstruction of Europe. During 
the war the purchases by the Allies from this country 
were financed with money advanced by the United States 
Government. For this purpose the sum of $10,000,000,- 
000 was appropriated, of which some $9,700,000,000 has 
been lent. So long as any part of this fund remained 
available, no special pressure was felt by the European 
Governments to whom it was being loaned, as it was 
expected that pressing European claims could be offset 
against the credits in this country. But now that this 
fund is used up, the question presents itself as to how 
further exports to Europe are to be financed. The fall 
in the rates of foreign exchange in the European coun- 
tries, which showed itself as this fund approached 
exhaustion, indicates the extent to which reliance had 
betn placed upon it. 

So far as the non-European countries of the world 
are concerned, those which were not directly affected 
by the war, no special problem seems to be presented, as 
they should be able, with the normal product of their 
unimpaired industries, to purchase the needed supplies. 
So far as they are borrowers their needs to-day differ 
in no essential respect from those existing before the 
war, while their credit is probably improved. The dis- 
cussion may therefore be confined to the European 
countries. 

The present need of Europe is undoubted. Food 
and other consumable commodities, raw materials, 
machinery, tools, and capital in all forms are necessary 
for the economic rehabilitation and reconstruction of the 
belligerent and, to a lesser extent, of the neutral 
countries. An estimate in the New York Times'^ placed 
the European financial requirements for the coming 12 

^ July 11, 1919. See also Journal of Commerce, July 12, 1919. 

333 



WAR COSTS AND THEIR FINANCING 

months at about $2,000,000,000. This sum '' probably 
will cover the more pressing needs and in all likelihood 
will suffice to start European industry and carry it for 
the coming year." On the other hand, the Federal 
Reserve Board announced^ that considerably more than 
$3,000,000,000 must be raised here by private initiative 
if the export trade of the United States is to be kept 
at its present level. The conclusion was reached that 
" means must be found during 1919 for the financing 
of about $3,000,000,000 of new obligations, and for the 
renewal of perhaps $600,000,000 of old ones. This 
makes a gigantic, probably an unprecedented, financial 
problem." No statistics exist which show exactly how 
much credit actually has been granted to Europe dur- 
ing the last twelve months, but the excess of exports 
over imports may be accepted as a fair measure of such 
financing. During the fiscal year ending June 30, 1920, 
the United States exported to Europe $4,864,155,166 
and received in return $1,179,460,699, the difference of 
$3,684,694,467 having been in large measure sold on 
credit. 

This capital is needed for the reconversion of fac- 
tories which had been devoting themselves to war pro- 
duction. It has been necessary to alter the machinery 
so as to make it suitable for peacetime production, and 
in some cases completely to reequip the factories and 
works. Moreover, in the case of such establishments, 
larger capital is now required for the sake of purchasing 
raw materials, of replenishing exhausted stocks, and of 
meeting charges until the new output can be sold. In 
many cases repairs have been neglected, and these will 
now have to be made at higher prices. In the devastated 
areas the demand for capital comprises materials for the 

^Bulletin, June, 1919. 

334 



FINANCING EUROPE AFTER THE WAR 

complete reconstruction of destroyed buildings or the 
entire equipment of industries of which the machinery 
has been destroyed, the stocks of raw material have 
been carried away, and the markets have been lost. 
Loans will have to be made to these areas for periods 
long enough to enable them to reconstruct their estab- 
lishments and regain their trade connections. On the 
whole, the demand now consists very largely of invest- 
ment loans for constructional work, which will be 
secured by mortgages upon fixed capital, rather than, 
as has usually been the case, by short term credit upon 
the security of consumable goods to be met out of the 
sale of these goods. As the needs are different, so the 
character of the credit will have to be different. 

It is clear that under existing conditions the energies 
of Europe, especially of the devastated regions, will be 
fully absorbed in the work of reconstruction and of 
restoring industries to a normal footing. For this task 
tl:e belligerents will need all the help that they can 
secure. For an indefinite period, which may be one year 
or five years, Europe will be compelled to borrow large 
amounts of capital. During this period it will scarcely 
be possible for the borrowing countries to attempt to 
repay their foreign indebtedness. Not only will they 
probably be unable to produce enough for their own 
requirements and to meet the interest charges abroad, 
but they will even be under the necessity of borrowing 
further sums. 

During the period of reconstruction the peoples of 
Europe will, on the whole, be too poor to indulge in the 
purchase of any consumable commodities except to meet 
their most urgent necessities. On the other hand, as 
has just been pointed out, their needs for capital goods 
will be great. We may therefore expect the character 

335 



WAR COSTS AND THEIR FINANCING 

of our foreign trade to be determined in part by this 
fact. Fewer luxuries and high priced consumable com- 
modities will be bought, but on the other hand, we may 
expect to see an increase in the purchase by Europe of 
construction material, machinerj^, implements, tools, and 
capital goods of various kinds as well as raw materials. 

A complication in the normal movement of foreign 
trade exists in the state of the foreign exchanges. These 
are highly unfavorable in the case of all the leading 
belligerent countries of Europe which are likely to bor- 
row most largely of the United States in the next few 
years. Such a situation acts in itself as an obstacle to 
the importation into those countries of American goods. 
On the other hand, there is given thereby a stimulus to 
exports to the United States.- Not content with the 
normal effect of rates upon the movement of foreign 
trade, several of the European nations have continued 
their war embargoes upon imports or have added new 
ones, which, however, are directed for the most part 
against the importation of luxuries or nonessentials. 
The present situation gives point to the movement for 
the larger use of dollar exchange. If exporters from the 
United States to-day take their pay in sterling exchange 
or other foreign currencies, they are exposed to loss 
through fluctuations in sterling or other rates. Credits 
should therefore be drawn in dollar exchange. 

To meet the demands of the war-swept countries of 
Europe will require enormous supplies of capital. From 
what quarters can these be drawn ? The United States 
will probably have to furnish the major share, but other 
nations may be relied upon to supply no inconsiderable 
part. The European neutrals, Japan and possibly some 
of the South American countries, as well as Great 
Britain and the British colonies will be able to advance 

336 



FINANCING EUROPE AFTER THE WAR 

I)art of tlie sum required. In some of these countries 
large profits were made during the course of the war, 
and it is not unreasonable to expect that some of these 
war profits will be devoted to the work of reconstruction. 
After all this is said, however, it remains true that 
the main dependence must be the United States. The 
needs of Europe will be for raw materials, railway 
equipment, agricultural machinery, and similar forms 
of capital; of some of these, as cotton, petroleum, and 
copper, this country is the main source of supply, while 
of others it is the largest producer. 

Has the United States an available surplus? It is 
necessary to answer this question in order to determine 
whether the needs of Europe can be taken care of by 
this country. On this point the answer must be an 
undoubted affirmative. The investment in Liberty loans, 
which averaged about $10,000,000,000 per year during 
the two years 1917-1919, may be taken as a partial 
measure of the savings possible for the American people. 
The normal needs of domestic industries for new 
capital has been estimated at about five billion dollars 
per annum. Even if it be granted that the savings will 
be less and the domestic demands greater, there would 
still be left a sum sufficient to meet the more pressing 
needs of Europe for reconstruction purposes. And such 
a calculation does not take into account our changed 
position from a debtor to a creditor nation, which has 
set free funds for foreign investment which formerly 
went to pay foreign charges for interest and services. 

The expenditure during the past year in this country 
of enormous sums for oil speculation, for pleasure auto- 
mobiles, and for other extravagances, is sufficient evi- 
dence that a surplus over real needs exists. 

Granting that funds exist in the United States that 

337 



WAR COSTS AND THEIR FINANCING 

may be loaned to Europe, the further question arises 
as to how these funds are to be made available for this 
purpose. By what machinery or methods is this capital 
to be collected and placed at the disposition of European 
borrowers? During the period when the United States 
was in the war, this question was solved by the Govern- 
ment's itself loaning money to the Allies and accepting 
therefor their promises to pay. The $10,000,000,000 
appropriated for this purpose, however, is now ex- 
hausted, and Congress has expressed an unwillingness 
to continue this method. It is clear that an end has 
come to direct loans by the United States Government. 
Indirectly, however, there remained authority for the 
issue by the War Finance Corporation of bonds to the 
amount of $1,000,000,000. This fund was to be loaned 
to exporters or to banks and other institutions that 
finance exporters for the purpose of promoting Ameri- 
can trade. The War Finance Corporation, however, 
made little use of the authority granted it and down to 
May 10, 1920, when further advances were suspended at 
the request of the Secretary of the Treasury, it had 
loaned only about $31,000,000.* 

Private sources and not the Government, it is evident, 
must furnish the requisite capital for the reconstruction 
of Europe. On this point the conclusions of Herbert 
C. Hoover, based upon a thorough study of the needs 
of Europe, are of great weight:^ 



In my personal view the largest part of the credits required 
from the United States should be provided by private credits 
and we should, except for certain limited purposes, stop the 
lending of the money of our Government, Credits next year 

* Press despatches of May 11, 1920. 

° Associated Press despatch from Paris, in Washington Post, 
June 10, 1919, 

338 



FINANCING EUROPE AFTER THE WAR 

are required for business operation, and when Governments 
are engaged in business, they always overspread and the 

years to come must be years of economy The 

credit of private individuals and firms of even the most wrecked 
states of Europe is still worth something, and what is needed 
is to reestablish confidence in such credits. 

If we undertake to give credits we should undertake it in 
a definite, organized manner. We should have consolidated, 
organized control of the assistance we give, in such a way 
that it should be used only if economy in imports is main- 
tained and if the definite rehabilitation of industry is under- 
taken — if the people return to work, if orderly government 
is preserved, if fighting is stopped, disarmament is under- 
taken and there is no discrimination against the United 
States in favor of other countries. 

If these things are not done, Europe will starve in spite 
of all we can do. The surplus of our productivity could not 
support a Europe of to-day's idleness, if every man of us 
worked 15 hours daily. 

It is one thing to say that capital must be loaned 
to Europe and that it must be done by private initiative ; 
it is quite another thing to work out the machinery by 
which credit may safely be extended. The problem is 
complicated because the amount of capital available for 
investment purposes is inadequate to meet the enormous 
demands which are being made and which in all proba- 
bility will continue to be made for the next three to 
five years. It has been suggested that some sort of 
rationing principle may have to be applied, and that 
if the work of reconstruction in the belligerent countries 
is to be advanced, credit and raw materials may have to 
be apportioned to them in accordance with their needs, 
rather than in strict accord with the security that can 
be offered.^ In the devastated areas of Europe industry 

"New York Times, June 16, 1919: F. A. Vanderlip, What Hap^ 
pened to Europe, p. 184. 

339 



WAK COSTS AND THEIR FINANCING 

is prostrate, and credit is insecure. The people in gen- 
eral are unable to pay for supplies, either with goods 
or with gold, and accordingly they must be permitted 
to pay with the only thing that they can offer, namely, 
their promises. Their position is like that of an insolvent 
debtor whose creditors advance him new loans in order 
that he may rehabilitate himself, or like that of a bank- 
rupt corporation that is temporarily financed by means 
of recei^^rs' certificates. 

Such a method of relief is obviously only of temporary 
value. The peoples of Europe alone can save themselves 
by their own industry, but they must be furnished with 
the raw materials and tools with which to work, and in 
some cases even with the food to support them until the 
first products of their toil are harvested. It is necessary 
to reestablish the industrial cycle as promptly as pos- 
sible. The present situation is an emergency one, but 
the period of the emergency may easily run to two or 
three years. For handling such a problem, Government 
machiner}^ is too slow, too rigid, too much influenced by 
political considerations, and too lavish. Many plans have 
been formulated in Europe calling for large expendi- 
tures for public works, frequently for unproductive and 
extravagant undertakings, for which there is strong 
pressure on the ground that they are needed to give 
employment. But as the amount of capital is limited, 
it must be granted with care, and all requests for loans 
must be carefully scrutinized, and if improper firmly 
rejected. 

The demands for loans range from short-term accom- 
modation to long-time credits running into permanent 
investments. For the purchase of food and of other 
consumable commodities cash payments or short credits 
will usually be demanded. For productive capital, such 

340 



FINANCING EUROPE AFTER THE WAR 

as agricultural and industrial machinery, which is used 
for further production and will normally provide the 
means of payment, longer credits are necessary, which 
may run from a year to 18 months. And finally, loans 
for the purpose of rebuilding plants which have been 
destroyed or of constructing new ones may be regarded 
as a permanent investment of capital. It is obvious 
that the machinery to care for these different forms of 
credit will be very diverse. 

Some of the devices that have been suggested for 
meeting the problems involved in short term credit may 
be briefly stated. Early in 1919 a group of American 
bankers arranged to grant an acceptance credit for 
Belgium banking institutions of $50,000,000 for the 
purchase of commodities in the United States, and a 
group of British banks and acceptance houses likewise 
arranged a credit for purchases in Europe to the amount 
of $20,000,000, in three-months bills renewable three 
times, making a total period for the bills of 12 months.^ 
Industrial credits have also been arranged with Ger- 
many, France, and Italy, and similar arrangements will 
continue until those countries rehabilitate their indus- 
tries and reduce their adverse trade balances.^ The 
continued exports to those countries from the United 
States, far in excess of the imports, evidence the 
extent to which such credit is being utilized. 

A suggestion put forward by Henry P. Davison of 
the firm of J. P. Morgan & Company, is that' of 
coordinating the resources of the entire banking and 
industrial community, both in this country and abroad 
rather than of the extension of individual credits by 
particular institutions. Credits w ould be established in 

["Times (London) Trade Supplement, May 17 1919 
«Aewj York Times, June 8, 1910 

341 



WAR COSTS AND THEIR FINANCING 

Europe secured by everything given against the ship- 
ment and further secured by the guarantee of the Gov- 
ernment. Against these, debentures would be issued 
by the banking group in this country and distributed as 
widely as possible among the investing public.^ 

Another plan is the formation of group export 
corporations to handle the foreign sales of single com- 
modities like cotton, copper, steel, tobacco, and other 
American products. Such group corporation would 
have the backing of a central securities corporation 
which would sell its debentures to the investing 
public. An attempt was made to organize the 
International Cotton Corporation along these lines 
but it was abandoned because of lack of support. 
The formation of discount houses has also been 
suggested, which would be organized for the purpose 
of dealing in foreign acceptances; such a company has 
been incorporated under the laws of New York State, 
to be known as the Foreign Trade Corporation. ^° 

Still another method which aims at the facilitating of 
grants of credit by American producers and manufac- 
turers who are without experience or established con- 
nections in foreign trade is the establishment of credit 
insurance. Companies organized for this purpose would, 
for a moderate charge, insure the exporter against loss 
due to the insolvency of the drawee of the bill. Such 
companies have already been organized in London, New 
York, and Chicago.^^ Similarly, the National Associa- 
t'un of Credit Men has organized a foreign-credit inter- 
change bureau, the object being a reciprocal exchange 
of knowledge and experiences in foreign trade. The 

« Xew York Times. June 14, 1919. 
"A'ew? York Times, August 15, 1919. 
^The Americas, Mav, 1919, p. 21. 

342 



FINANCING EUROPE AFTER THE WAR 

plan is based on the domestic interchange system which 
has worked so well in this country.^^ Finally, legisla- 
tion has been passed by Congress granting permission 
to national banks until 1921 to invest not more than 
five per cent, of their capital and surplus in corporations 
organized to finance foreign trade. ^^ 

]\Iany of the demands for credit on the part of Europe, 
however, will not be for short time accommodation, but 
will consist rather of long credits and even of permanent 
investments. To meet this need several other methods 
have been suggested. A thorough-going scheme has been 
outlined by Mr. Vanderlip^* in the form of an interna- 
tional loan between a group of lending nations on the 
one hand and of borrowing nations on the other. Credits 
would be allocated and would be secured by first liens 
on the customs revenues; the bonds would be floated in 
the loaning countries. The bonds might run for, say, 
15 years, but could be liquidated in advance if desired. 
The obstacles to this plan, however, are probably 
insurmountable. 

For the long term demand good results may be 
obtained by the investment-trust method. These invest- 
ment trusts work on the insurance-company plan, select- 
ing securities from all parts of the world and thus 
spreading the risks by the diversification of their 
holdings. Successful organizations of this kind exist in 
England, Scotland, France, Belgium, Switzerland, and, 
in fact, in all the creditor nations. ^^ Such a method 
seems to lend itself peculiarly well to the present situa- 
tion between the United States and Europe. A longer 
step in the direction of permanent investment in Euro- 

^^ Journal of Commerce, July 5, 1919. 

"Act of September 17, 1919. 

"Op. cit., p. 183. 

^^ Journal of Commerce, April 16, 1919. 

343 



WAR COSTS AND THEIR FINANCING 

pean countries is the inviestment of American capital in 
foreign manufacturing, mining, and lumbering prop- 
erties. In view of the strong nationalistic tendencies 
and the heavy taxation now evident in Europe, however, 
it is doubtful how far such an invasion of American 
capital would be successful. 

The latest plan suggested is contained in the Edge 
act approved by the President December 24, 1919.^^ The 
purpose of this measure is to promote American export 
trade by providing a method for foreign purchasers to 
obtain goods on credit backed by collateral, but at the 
same time provide cash for the American exporters. 
Private corporations for " international banking or 
financial operations with a capital of not less than 
$2,000,000 are authorized, subject to the control of the 
Federal Reserve Board. These have power to deal in 
all foreign exchange operations and to issue debentures 
to ten times the amount of their capital and surplus. 
Branches may be established in foreign countries, and 
combinations are permitted in the United States which 
would ordinarily be forbidden under the anti-trust 
laws. Under the Federal Reserve Act national banks 
are not allowed to rediscount long term paper, but the 
Edge corporations will be permitted to accept foreign 
securities in lieu of cash and then obtain ready money 
by the sale of their debentures to American investors, 
or they may use such securities as collateral for loans. 
Such a corporation would correspond to the investment 
trust as this has been developed in Great Britain and 
various European countries. Thus far only one corpo- 
ration has been organized under the Edge act. 

An ambitious and far-reaching scheme was proposed 
by Senator Owen, who drew up a bill to create a power- 

"S. 2472, 66th Congress, 1st Session. 

344 



FINANCING EUROPE AFTER THE WAR 

fill Foreign Finance Corporation to operate under 
Government supervision.^^ The capital would be sub- 
scribed by the Government, by the national banks, and 
by the public, and the Corporation would be chartered 
to engage in the business of stabilizing foreign exchange 
and extending long-time credits to foreign nations. The 
Corporation would have authority to sell its bonds, 
secured by foreign bonds or other securities. Little, 
however, has been heard of this plan since its proposal ; 
indeed, it may be said that this, like many of the other 
suggestions put forward, has served its most useful 
purpose in provoking discussion, and leading to a more 
careful study of the situation. Conditions have changed 
so rapidly that plans have necessarily been altered to 
meet the changes in the situation, and it is even yet too 
soon to say what the final outcome will be. The only 
thing certain in the discussion is the need of Europe 
and the certainty that some practicable method will 
finally be devised for advancing the necessary funds. 
That a large movement of American capital to Europe 
is actually taking place is evidenced by the estimate of 
Werner Wintermantel, Director of the American 
Department of the Deutsche Bank in Berlin, that since 
the Treaty of Versailles rather more than 15,000,000,000 
marks of American capital had been invested in 
Germany.^^ 

Another phase of the situation which must be taken 
into account is the need of educating the American 
investor to buy foreign securities. Until the war the 
American investor knew little of and cared less for 
foreign investments. Domestic issues offered, on the 
whole, larger returns and had the advantage of being 

" 'New York Times, July 9, 1920. 

345 



WAR COSTS AND THEIR FINANCING 

familiar and put out by domestic corporations or govern- 
mental bodies. Except for some Japanese and Canadian 
Government bonds and Mexican and Argentine railway 
bonds, there were few holdings of foreign securities 
in this country. Much was done during the war toward 
interesting American investors in foreign government 
securities, and the present listing of Canadian, French, 
and British Government and French municipal bonds 
shows the esteem in which they are held. The total 
amount of private investment in the securities of foreign 
Governments during the first three years of the war 
amounted to about $3,000,000,000. If the program is 
carried out of having the suins needed for the recon- 
struction of Europe supplied by private initiative in 
the United States, it will be necessary for something like 
this sum or an even greater amount to be advanced 
again in a similar period. To market foreign securities, 
however well secured, on such a scale as this will require 
a campaign of education. It will also call for the con- 
tinued exercise of thrift and saving, for such sums 
cannot be subtracted from the amount at present 
annually invested in American productive industry: 
it must be provided out of the savings of the people. 

Such a campaign to promote a larger investment in 
foreign securities is justifiable. The idea that the long- 
term paper representing European loans shall be taken 
out of the portfolios of the banks and placed in the 
strong boxes of investors is a sound one. If this can 
be done, further inflation will be avoided and real 
savings effected. From this standpoint a series of issues 
distributed as widely as possible throughout the country 
is greatly to be preferred to a single great operation 
which is likely to lead to financial congestion. 

A beginning in this direction has already been made 
346 



FINANCING EUROPE AFTER THE WAR 

by the recent flotation of a Belgium 7>^ per cent. 
25 year loan for $50,000,000, and of a Swiss 8 per cent. 
20 year loan for $25,000,000. Both of these were sub- 
scribed at once by investors. 

If the investment habits of the American people are 
to be altered and they are to be persuaded to invest in 
foreign securities, there must be no question as to the 
soundness of these securities. Failure in such a pro- 
gram, or even serious mistakes, might jeopardize the 
whole movement. The securities offered must be unques- 
tionably good as to safety, interest rate, conditions of 
repayment, and other terms. It has been suggested that 
the loans made might be secured by a first lien on the 
revenues of the borrowing countries ;^^ but such a pro- 
posal, although it might add to the security of the bond, 
can scarcely be entertained as a practicable method. 
Although investors may be appealed to on broad-minded 
grounds to aid in the work of reconstruction in Europe 
by lending their savings, such loans should be for con- 
structive purposes and must be adequately secured. 
Capital cannot be withdrawn from domestic investment 
beyond a certain point without impairing our own ability 
to render further assistance. The development of 
American industries must be maintained and expanded 
eoincidently with the restoration of European enterprise. 

In conclusion, certain principles which emerge from 
the foregoing discussion may be briefly stated. 

1. The European situation must be treated as a whole, 
for economic breakdown at any one point would 
inevitably have a disastrous effect upon the rest of the 
world. This means the absence of discrimination. 

2. Every effort must be made to avoid further infla- 
^^F. A. Vanderlip, op. cit., p. 185. 

347 



WAR COSTS AND THEIR FINANCING 

tion. If long term securities are used as the basis of 
future financing, these must be got as quickly as possible 
into the hands of permanent investors. It is highly 
undesirable to throw additional burdens upon the banks 
in the way of long time investments. 

3. The best method of handling the credit situation 
is probably by having group credits arranged by finan- 
cial, commercial, and industrial interests in a certain 
region, or by a single industry for a wider district. Such 
credits could then be granted by groups of, say, Ameri- 
can bankers who stand in close touch with the producers 
and exporters of the commodities to be purchased with 
these credits. 

4. Short term credits on the whole are preferable to 
long term bonds, for every effort must be made to 
restore business to a normal basis as promptly as 
possible. 

5. When this time arrives larger imports must be 
expected, and ultimately our so-called " favorable " 
balance of trade will be reversed and an excess of 
imports over exports become a normal phenomenon. 
This is the inevitable result of our present position as 
a creditor nation and may be expected to persist unless 
we continue to invest the balances due us in additional 
foreign securities or in permanent investments abroad. 
This, however, would only postpone the change and 
make it more far-reaching in the end. For the immedi- 
ate future it is the duty, as it is the interest, of the 
people of the United States to loan their available 
savings to aid in the reconstruction of Europe and to 
accept pay in the promises of that war-swept continent. 

Wliile these and other plans for a broad scheme of 
economic reconstruction and financial assistance have 

348 



FINANCING EUROPE AFTER THE WAR 

been under consideration, the actual movement of goods 
has not been delayed. There has been much individual 
effort on the part of single branches of trade and 
industry, even though coordination on a national scale 
is as yet lacking. This is clearly shown in the volume 
of exports, the monthly totals of which show an increase, 
intermittent but real. Although part of this increase is 
due to advancing prices, there is still, after deduction 
for this factor, a remarkable growth. The following 
table gives the merchandise imports and exports of the 
United States by months for the year 1919 : 

United States Imports and Exports of Merchandise, by 
Months, 1919 





Imports 


Exports 


Excess exports 
over imports 


January 

February 

March 

April 


$212,992,644 
235,124,274 
267,596,289 
272,956,949 
328,924,393 
293,069,779 
343,746,070 
307,293,078 
435,448,747 
401,845,150 
424,824,073 
380,710,323 


$622,552,783 
585,097,012 
603 , 141 , 648 
714,500,137 
606,379,599 
918,212,671 
568,687,515 
646,054,425 
595,214,266 
631,618,449 
740,033,585 
681,649,999 


$409,560,139 
349,972,738 
335,545,359 
441 , 543 , 188 


May 


277,455,206 


June 


625 , 142 , 892 


July 

August 

September 

October 

November 

December 


224,941,445 
338,761,347 
159,765,519 
229,773,299 
315,209,512 
300,939,676 


Total 


$3,904,378,733 


$7,921,196,047 


$4,016,818,314 



The larger part of these exports and the group which 
shows the most marked increase, consists of foodstuffs 
and raw materials. The need in Europe for these sup- 
plies is so desperate and so immediate that they must 

349 



"WAR COSTS AND THEIR FINANCING 

be had on almost any terms. Wliether our exports will 
continue on the same high level after the most urgent 
demands are satisfied is a question open to much doubt. 
The adverse exchange situation raises the cost of Ameri- 
can exports to most European countries and to that 
extent reduces their willingness to purchase our goods. 
Moreover, because of their enormous indebtedness to the 
United States, incurred during the war, they are un- 
willing to add to that burden. Import restrictions have 
been imposed, an apparent indisposition to arrange 
credits and make known their needs has been mani- 
fested,^^ and a low exchange rate has apparently been 
regarded with favor as tending to limit foreign pur- 
chases. It is too soon to speak with certainty as to the 
future, but it must not be forgotten that in international, 
as in domestic, commerce the purchaser, in the final 
analysis, determines the volume and character of the 
trade. 

^ Cf. statement of F. I. Kent, director of the War Finance 
Corporation, in an interview after his return from Europe, Xew 
York Times, July 19, 1919. 



CHAPTER XII 

AFTER- WAR PROBLEMS OF CURRENCY AND DEBT 

Inflation of the currency a world phenomenon — Its effect on 
prices — Why should inflation have been permitted ? — The 
remedy for inflation — Difficulties — The distribution of 
gold — Financial situation of the principal countries — Com- 
parison of wealth and debt — Can the burdens be carried? — 
American and European theories as to debt payment — 
Problem of funding the floating debts — The capital levy — 
Problem of refunding — Will the debts be paid? 

One of the most urgent problems left by the war is 
the reduction of the enormous inflation now existing in 
money and credit throughout the world. With an all 
but universal suspension of specie payment, the expan- 
sion of currency issues and of banking credits went on 
practically unchecked throughout the war. The result 
is that to-day the note and deposit liabilities of the 
European banks are altogther out of proportion to the 
metallic reserves upon which they are supposed to rest. 
The same is true also of the smaller amounts of direct 
Government issues. This expansion in the volume of 
currency was caused by the urgent needs of the 
Governments during the war, which forced them 
to rely upon advances from the central note-issuing 
institutions. In ordinary commercial transactions an 
issue of bank notes or the creation of a credit deposit 
is based upon commercial paper, and the expansion 
of the means of payment is limited by the amount of 
legitimate business requiring to be financed. During 
the war, however, no such checks were placed upon 
inflation. The only limit was the need of the Govern- 

351 



WAR COSTS AND THEIR FIXA^'CIXG 



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352 



PROBLEMS OF CURRENCY AND DEBT 





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353 



WAR COSTS AND THEIR FINANCING 

ment, and issues were made in response to the demands, 
not of commerce, but of war's necessity. The problem 
that now presents itself is that of the deflation of the 
paper money in circulation and the restoration of 
the gold standard, if this is possible. 

The changes that took place in the gold reserves and 
note circulation of the central banking institutions of 
the leading European countries and of the United States 
during the war are shown in the accompanying table. 
Not all of the increases in the note issues can be counted 
as net additions to the media of exchange, for a certain 
proportion simply took the place of gold and silver 
which formerly circulated as coins but which have now 
entirely disappeared from circulation. On the other 
hand this table does not show the direct issues of paper 
money by the Governments, such as were made in Italy, 
Germany, and other countries. It has been estimated 
that this increase of nearly 30,000,000,000 dollars in the 
money of the world is more than the value of all the 
gold and silver produced by all the mines of the world 
since the discovery of the New World. 

The inflation which began during the war unfortu- 
nately continued after its cessation at an accelerated 
rate. It was impossible for the belligerent countries 
suddenly to reduce their expenditures or to increase 
their revenues and they continued to resort to loans and 
the issue of paper money in order to meet the deficits. 
In the thirteen months between the Armistice and the 
end of 1919 it is estimated that the paper money in cir- 
culation in the principal countries of the world increased 
about 35 per cent.^ The table on pages 352 and 353 shows 
the gold reserves and note circulation in 1914 and 1918. 

* See talile compiled by 0. P. Austin in The Americas^ January, 
1920, p. 27. 

354 



PROBLEMS OF CURRENCY AND DEBT 

In addition to note issues there was a considerable 
increase in the credit currency of the world in the form 
of bank deposits, which are a more volatile and inflation- 
ary form of currency than circulating notes. There was, 
moreover, a considerable increase in the use of checks 
during the war in such countries as France and Ger- 
many, where formerly little resort was had to deposit 
banking. The following table shows the bank deposits 
of the principal countries at the beginning and the end 
of the war: 



Bank Depostis 

{In thousands) 



1913 



1918 



Great Britain 

France , 

United States 

Canada 

Italy 

Japan 

Argentina. . . 

Spain 

Switzerland.. 

Sweden 

Germany. ... 



$5,521,645 

1,327,770 

10,503,695 

1,166,180 

407,135 

926,880 

684,190 

262,245 

397,585 

402,905 

2,715,785 



$24,316,015 



$11,250,000 

2,172,875 

» 30,000,000 

2,085,060 

1,795,080 

» 2,600,000 

1,207,135 

1516,000 

1 955 , 000 

953,770 

19,913,000 



$63,447,920 



Increase— $39,131,905, or 162 per cent. 



Without going into the vexed question as to what 
constitutes inflation, this statistical presentation of the 
facts would seem to indicate that inflation has taken 
place as a world movement by reason of the enormous 

^Estimates based on exact figures so far as available and sup- 
plemented by estimates based on 1917 figures where those for 
1918 are lacking. 

355 



WAR COSTS AND THEIR FINANCING 

addition to the circulating media of the belligerent and 
even of the neutral countries. If inflation be defined 
as a more rapid increase in the means of payment than 
Id the volume of business, there seems to be little doubt 
that it has occurred on such a scale as to have affected 
all price relations in every country of the globe, no 
matter how remote from the war. Inflation has resulted, 
not because the ratio between gold and credits has been 
changed, for the gold base is probably still sufficient in 
most countries to maintain the redeemability of the 
credits based upon it, but because the ratio between 
money and purchasable commodities has been distorted. 
It is impossible to trace the exact effects of this 
increase in money upon prices, and it is equally impossi- 
ble to tell what part was played in the general rise of 
prices throughout the world by this factor and to what 
extent this was due to other price-raising factors at 
work, such as government loans, scarcity of commodities, 
etc. In the report of the Committee on War Finance of 
the American Economic Association^ a very careful 
analysis of the various factors entering into the situation 
in the United States was made, the chief findings of 
which are here summarized. \Tlie growth of business, 
which may be said to constitute the demand for money, 
increased about 13 per cent, between 1913 and 1918. 
On tile other hand, the supply of money in the form 
of actual money in circulation increased 60 per cent, and 
the bank deposits 94 per cent, in the same period. In 
other words, the means of payment increased more 
rapidly than the business transactions for the conduct 
of which they were needed. The result would normally 
be an increase of prices and this is sho\\Ti actually to 

"Published as Supplement No. 2 of the American Economic 
Review, March, 1919. 

356 



PROBLEMS OF CURRENCY AND DEBT 



have taken place. Wholesale prices increased 96 per 
cent, and wages 69 per cent./ The following table shows 
the essential facts in tabular form :^ 

Movements of Money, Prices and Wages in the United States, 
1913-1918 



Year 


Growth 

of 
business 


Monetary 
circula- 
tion 


Growth 
of bank 
deposits 


Whole- 
sale 
prices 


WAGES 


N. Y. 
State 


Union 
scale 


1913 
1914 
1915 
1916 
1917 
1918 


100 
99 
103 
107 
112 
113 


100 
103 
109 
123 
145 
160 


100 
106 
114 
141 

168 

(194) 


100 
99 
100 
123 
175 
196 


100 
103 
115 
131 
169 


100 
102 
103 
107 
' 114 



It would be going too far to say that monetary changes 
alone have brought about the great rise in prices. The 
curtailment in the supply of commodities, the difficulty 
and cost of shipment, and the changes in demand have 
all been so great that their combined influence has prob- 
ably been greater than that of changes in the supply of 
money. The number of nations at war and the extent 
to which they mobilized their economic resources for 
military purposes enormously intensified the demand for 
articles needed in the prosecution of the war, while, on 
the other hand, articles not so needed were designated 
as non-essentials and often ruthlessly suppressed. The 
general and continued demand on the part of so many 

^ Ihid., pp. 94, 107. Explanation and limitations as to the 
manner in which these figures were obtained are given in the 
report, to which the reader is referred. The statistics are 
reproduced here without these notes simply to present a picture, 
believed to be wholly accurate, of the changes which have taken 
place in the circulating media, prices, and wages. 

357 



WAR COSTS AND THEIR FINANCING 

countries for articles needed in the war immediately drove 
up the prices of those articles, while the mobilization of 
vast armies, the expansion of governmental functions, 
and the general disorganization of credit all combined to 
create a demand for more money. But in many cases 
the issues were made, as has been indicated, without 
reference to purely monetary needs, and indeed far 
exceeded these. This brought about a further rise in 
prices, and so the vicious, never-ending circle was 
introduced. 

If responsibility for this world-wide phenomenon could 
be fixed, it would undoubtedly be found that the impetus 
toward higher prices came from Europe. The rise in 
prices occurred in England and France before it did in 
the United States. So far as prices rose in the United 
States in 1915 and 1916, the increase was principally 
due to the European demand for our commodities. 
After that, the addition to our circulating medium and 
bank reserves of a steady stream of gold and later our 
own currency and credit expansion combined to con- 
tribute to this end. It was a movement which could not 
be isolated, and by the end of the war no country, 
however remote from the seat of the conflict, had been 
able to escape the general upward movement of prices. 
Owing to the existence of enormous issues of fiduciary 
money, much of which will probably remain for years 
as inconvertible paper money, it is probably safe to say 
that the world has entered upon a higher level of prices 
which will endure for at least a generation. 

It will be impracticable here to trace in detail the e^dl 
effects of inflation. The most obvious one, and that of 
the most far-reaching consequence, has been the rise in 
the prices of commodities, but this has already been 
sufficiently described. As is usual in situations of this 

358 



PROBLEMS OF CURRENCY AND DEBT 

sort, wag'cs did not adjust themselves as rapidly as did 
prices of commodities, and consequently the purchasing 
power of earnings was greatly diminished and a heavy 
load placed upon certain classes of workers whose earn- 
ings did not increase proportionately and also upon 
persons with fixed incomes. Another effect of the exces- 
sive currency issues was seen in the derangement of 
foreign exchanges. This was due in a measure to the 
disorganization of trade movements and to the shift in 
trade balances, but in part it must be attributed to 
the uneven depreciation of the currency in the different 
countries which resulted from their different degrees of 
resort to inflation. The position of the banks, too, has 
been greatly affected by the changes which have taken 
place in bankable paper. Their assets have been very 
largely transformed from the short term paper of manu- 
facturers and merchants to Government obligations of 
one kind or another. The solvency of the banks is 
linked very closely with the credit of the states. It 
would seem, therefore, that the problem of the retire- 
ment of the bank circulation cannot be solved until that 
of the payment of the debts themselves has been met. 

Why should inflation have been permitted? The les- 
son of history on this point was clear and well under- 
stood. The experiences of France during the Revolution, 
of England during the Napoleonic wars, and of the 
United States during the Civil War were all matters of 
record and offered sufficient warning against repeating 
the mistakes of these periods. There was not in the 
World War, it is true, a repetition of the grosser form 
of inflation by the issue of irredeemable government 
paper money ; it took the subtler form this time of the 
expansion of bank notes and of bank credits. It may 
be that in some quarters there was a hope that for this 

359 



WAR COSTS AND THEIR FINANCING 

reason the obvious results of inflation might be avoided. 
But a more likely and sufficient explanation is the urgent 
necessity that all Governments were under, of raising 
money at once in the easiest way. 

In some cases, notably in Germany, the view was held 
and acted upon that a plentiful supply of money would 
ease the transition from peace to war economy, and this 
notion doubtless had its influence in other countries. 
It is not difficult to find expressions of satisfaction dur- 
ing the earlier years of the war that war financing had 
been accomplished so easily and without violently affect- 
ing rates in the money markets. This was avoided by 
the issuance of paper money and also by the elimination 
of industrial issues which might compete with Govern- 
ment loans. In other words, the stand was taken that 
the flotation of loans was aided by the debasement of the 
currency. Once entered upon, this policy doubtless 
received further encouragement from the desire of the 
Ministers of Finance to keep down the rate of interest 
on the enormous loans which followed one another in 
such rapid succession. 

From another standpoint the inflation of the currency 
with the consequent rise of prices aided the policy of 
the Governments in financing the war by curtailing the 
consumption of nonessentials, thereby setting free for 
war purposes labor and capital that would otherwise 
have gone to other lines of production. Later it was 
sought to secure this end by rationing, by thrift cam- 
paigns, and finally by taxation. It may fairly be argued 
that an earlier and more drastic resort to this last method 
would have rendered the policy of inflation with all its 
attendant evils necessary in a much less degree. It 
may well be doubted whether a war of such magnitude 
could have been carried on without some degree of 

360 



PROBLEMS OF CURRENCY AND DEBT 

inflation, but that it could have been greatly minimized 
is hardly open to doubt. 

The evil effect of inflation on the Treasury, not to 
mention other results, lies in the fact that the Govern- 
ment receives in taxes or from the sale of its bonds 
money which is constantly declining in purchasing 
power. After the war, with the return of more normal 
conditions and the gradual contraction of the currency, 
these bonds will be redeemed in dollars of higher pur- 
chasing power. The loss to the Government is measured 
by the difference between the two measures of value. 
But this loss is accompanied by a social cost which is 
infinitely greater and more widespread, and may carry 
with it serious social and industrial disorganizations and 
readjustments, leading possibly to revolution and in 
extreme instances to complete anarchy. It is going too 
far to claim any causal connection between the two, but 
it is noteworthy that Bolshevism should have proceeded 
furthest in Russia, where the debasement of the currency 
far exceeded that in any other nation. Moreover, indus- 
trial unrest is probably greatest in the other countries 
that have most closely followed Russia in this direction. 

The remedy for the evils of inflation is contraction. 
But when this is said, the problem has merely been stated 
in another form, for the question at once presents itself 
as to how and when such contraction is to be effected. 
In the case of direct Government issues, the inability of 
the Government in the majority of cases to meet present 
budget requirements out of revenue will effectually pre- 
vent any retirement of the noninterest bearing debt. 
However bad may be the effects of an inflated currency, 
it is not to be expected that any considerable part of 
the proceeds of taxation will be devoted to its reduction. 
The most that can be hoped for is the accumulation by 

361 



"WAR COSTS AND THEIR FINANCING 

the issuing country of a sufficient metallic reserve to 
deprive the issues of the character of fiat money. 

The expansion of note circulation and of credit 
deposits on the part of the banks would under normal 
conditions automatically correct itself; as loans fell due, 
the credit would be cancelled, and as the notes were 
presented for redemption, they would be retired. In 
circumstances as they exist in Europe, however, neither 
of these things is necessarily true. Since the notes 
represent for the most part compulsory advances to the 
State and bear little or no relation to the metallic 
reserve, it may be impossible for the banks to resume 
specie payments and thus to permit the working out of 
the principles of supply and demand. The huge de- 
posits of the banks, too, are in large part public deposits 
and will not be immediately reduced, since the obliga- 
tions upon which they rest will presumably be renewed 
many times. Ultimately, however, this debt of the State 
will be funded and the banks permitted to resume their 
commercial functions. But even then a reduction in the 
media of exchange cannot be looked for. The issues of 
enormous quantities of bonds have afforded unexcelled 
collateral for bank credit, and with a better knowledge 
of the advantages of deposit banking in Europe, further 
expansions of bank currency, rather than its reduction, 
may be expected. This is even more true of the United 
States, where the people are already thoroughly 
habituated to the use of checks, and where the presence 
of an enormous gold reserve, which is not likely to leave 
the country, except in inconsiderable quantities, as long 
as the present favorable trade balances persist, will per- 
mit a still further expansion of credit. 

Another difficulty connected with the resumption of 
specie payments by the banks is the uneven distribution 

362 



PROBLEMS OF CURRENCY AND DEBT 

of gold among the nations of the world. The United 
States possesses a gold reserve which constitutes prob- 
ably the largest store of gold ever brought together 
since the beginning of recorded history. The holdings of 
the Federal Reserve Banks amounted on June 25, 1920, 
to $1,971,696,000. The Bank of Russia stands second 
on the basis of the last published report of that institu- 
tion, October 20, 1917, but it is scarcely conceivable that 
this reserve has remained intact. The Bank of France, 
which comes next, may therefore be given second place 
with a total stock on June 24, 1920, of $1,116,000,000, 
including that held abroad. The Imperial Bank of 
Germany holds, or held, the fourth largest amount of 
gold. On October 7, 1918, it held $620,000,000, the 
greatest reserve of any time during the war, but this 
amount steadily declined after that time, partly as a 
result of the restitution of the gold taken from Belgium 
and from Russia and partly as a result of payments for 
food and raw materials. By March, 1919, the gold held 
by the Reichsbank had declined to about $456,000,000, 
and by June 24, 1920, it had sunk to $272,000,000. 
At that time, therefore, Germany was surpassed by both 
Great Britain and Japan. The total gold holdings of 
the Bank of England, including the coin and bullion held 
against the currency notes, amounted on June 24, 1920, 
to $589,000,000. The gold held by the Bank of Japan 
amounted on March 27, 1920, to $461,000,000. The Bank 
of Italy reported its total '' cash " at $298,000,000 on 
May 20, 1919, but this included items other than gold; 
by June 24, 1920, the gold reserve had shrunk to 
$160,900,000. 

The reserves of the banks of the neutral countries 
have all been greatly strengthened, but a few of the 
former belligerents lost practically all the gold they 

363 



WAR COSTS AND THEIR FINANCING 

formerly held. The reserves of the Bank of Rumania 
have probably been lost as a result of their removal to 
Moscow. The gold reserves formerly held by the Austro- 
Hungarian Bank and the Ottoman Bank were drained 
off in payments to the Reichsbank, and now the reserves 
of the latter are being depleted by the payments for food 
supplies. Before the belligerent nations of Europe can 
resume specie payments, it is evident that some of them 
must purchase gold, and that all of them will have to 
reduce their outstanding issues and bring the notes into 
a more correct relation to the metallic reserves. 

A reference to the table on pages 352-3 will show the 
percentage which the gold reserves constitute of the 
note issues in the countries there listed. The warning 
should be given at this point that the sums of gold thus 
listed are not held against the note issues, but constitute 
the total gold reserve of the bank against all liabilities. 
Even assuming that they were available exclusively for 
note-redemption purposes, it is evident that it will be 
impossible for the banks of Russia, Germany, Austria- 
Hungary, Italy, and Finland, and probably France, to 
attempt redemption of the outstanding issues without 
materially strengthening their reserves. If this pro- 
gram is carried out, years must elapse before specie 
payments can be resumed. The more radical method of 
deflation by devaluation may be adopted by some of the 
countries as the quickest solution of the difficulty 

The production of gold in the world fell off during 
the very period when these enormous additions were 
being made to the note issues. Partly as a result of the 
rising cost of production, which affected gold mining as 
well as other activities, and partlj^ because of other 
factors, such as the cutting off of the Russian supply 
and the exhaustion of the Australian mines, the output 

364 



PROBLEMS OF CURRExNCY AND DEBT 

of gold has shown a steady decrease since 1915. The 
following table shows the annual gold production of 
the world for the six years 1914-1919 :* 

1914 $439,078,260 

1915 470,466,214 

1916 454,176,500 

1917 423,950,200 

1918 380,924,700 

1919 365,166,000 

The problem of the restoration of the gold standard 
is complicated by the falling off in production at the 
vtry time when the need for larger gold reserves is 
greatest. It would seem, therefore, that the adjustment 
of note issues to reserves must be made by the diminution 
of the former rather than by the increase of the latter. 
As any other method would result in a further addition 
of money to a supply already too large, this process 
must be commended. It may be noted at this point that 
such a process of reducing the outstanding note issues 
has been initiated in Hungary, Italy, and France dur- 
ing the first half of 1920. 

A further complication arises from the unwillingness 
of those countries possessing considerable stocks of gold 
to part with it. None of the European nations has as 
yet removed its embargo upon the export of gold on 
private account, and Great Britain prohibited exports 
after April 1, 1919. On the other hand, the prohibition 
of the export of gold from the United States, which was 
imposed shortly after this country entered the war, was 
removed in June, 1919. Since the movement of gold is 
toward, rather than away from, the United States, how- 
ever, except to a few Latin- American and Oriental coun- 
tries, there does not exist to-day such a thing as a free 

* Federal Reserve Bulletin, January, 1919, p. 19. 

365 



WAR COSTS AND THEIR FINANCING 

world movement of gold as a corrective of unfavorable 

rates of exchange. 

Not merely are the note issues excessive in amount and 
subject to varying degrees of depreciation; they have 
also but a limited currency, as they are in many cases 
so thoroughly distrusted by neighboring countries as to 
be refused acceptance. As a result of the fluctuations 
in the value of the currency and consequently in the 
rates of foreign exchange, a highly speculative feature 
has in many cases been introduced into trade which acts 
as a retarding influence. In certain sections monetary 
transactions have all but broken down and trade has 
reverted to barter. Among certain of the States that 
formerly made up the Austrian-Hungarian Empire 
and among the Balkan States, the attitude of each 
State toward its neighbor is so hostile that exchange has 
almost ceased. The following condensed account taken 
from an Austrian paper illustrates this point vividly:^ 

Permission to place any amount to the credit of a German- 
Austrian or a Vienna bank with a Bohemian branch is as a 
rule only granted by the bank-note clearing house, in cases 
of the import from German Austria of goods urgently needed 
in Bohemia and which come for the most part under com- 
pensation traffic and cover only a part of the debts which 
German Austria should collect for supplies of sugar, coal, and 
other necessities from Bohemia. German-Austrians, too, can 
be given credit grants only with the approval of the clearing 
house. . . . Matters are further complicated by the absence 
of a note bank in Czecho-Slovakia at which commercial bills 
and loans on effects could be mobilized. . . . Monetary 
transactions with Poland are, of course, quite at a standstill, 
since, in addition to the prohibition upon import of kronen, 
all postal and telegraphic traffic is suppressed. German- 

^ OesterreicMsche Yolksicirt, May 10, 1919, quoted in "Recon- 
struction Supplement " to the [British] Review of the Foreign 
Press, London, June 18, 1919. 

366 



PROBLEMS OF CURRENCY AND DEBT 

Austrian banks only receive news of their branches from 
time to time by courier, and orders for payment can only 
be passed through the same channels. . . . The Ukraine 
has introduced a compulsory rate of exchange of one-half 
karhovonez for the krone. There are practically no money 
transactions with the Ukraine, and it is only through the few 
couriers that the payments can be made. . . . Jugo-Slavia 
has taken the most stringent measures against money trans- 
actions with German Austria. In addition to the note stamp- 
ing and the prohibition of import and export of currency, 
it has applied to German Austria the old Serbian law for- 
bidding payments to the enemy, so that German Austria can 
no longer use its possessions in Jugo-Slavia. Exchanges 
between Jugo-Slav kronen and German- Austrian currency 
are as rare as between Czech and German- Austrian kronen. 

So far as the immediate future is concerned, there 
seems little evidence that a diminution of the European 
notes now issued will be effected or that the expanded 
bank credits will be reduced. On the contrary, there is 
every reason to believe that these will be further 
increased. New credits are being asked for the 
rehabilitation and reconstruction of Europe. Further 
loans are being floated by the European countries, 
neutral as well as belligerent, for the most part in the 
United States, but sometimes also at home. Until these 
new securities are ^' digested," they will serve as the 
basis of further expansion of deposits and to that extent 
will increase the existing inflation. 

In addition to these sums, German indemnity bonds 
will probably soon appear on the market. Although the 
method of their distribution is not clear, it is altogether 
probable that they will be made the basis of further 
borrowings and credit expansion and thus still further 
increase the existing inflation. It is improbable, in view 
of these conditions, that deflation will occur soon or on 

367 



WAR COSTS AND THEIR FINANCING 

any appreciable scale. On the contrary, we may rather 
look forward to a continuation of present high prices in 
most nations. So far as these are due to scarcity of 
goods, this factor will gradually be corrected by the 
resumption of normal activities throughout the world. 
But so far as they are attributable to currency and 
credit inflation, no decided change can be expected for 
several years. It may be assumed that the world has 
entered upon a more or less permanent higher price 
level. The necessary adjustments can be made most 
quickly and easily in the United States, but even here a 
complete return to pre-war conditions need not be 
expected for some time. 

Difficult as are the problems raised by the currency 
and banking situation, those connected with the public 
debt are even more grave. The growth of the debt in 
most of the belligerent countries proceeded more rapidly 
than the enlargement of the tax system, so that the 
revenue in these countries is insufficient to meet the 
ordinary expenditures of government and the interest 
on the public debt. Indeed, for the European belliger- 
ents the revenues barely sufficed to meet either one of 
these items alone. If the debts were completely 
expunged, the financial situation would still present 
difficulties; and with the charges for debt service 
unchanged and ever increasing, the problem is serious 
in the extreme. The ordinary civil expenditures have 
increased greatly from those of the pre-war period, 
though not in the same proportion as the interest 
charges. The following table shows for the leading 
countries the amounts that it was necessary to raise for 
the civil budget and for interest charges on the debt, and 
the revenues, for the fiscal year following the Armistice : 

368 



PROBLEMS OF CURRENCY AND DEBT 



Civil Budgets, Revenues, and Interest Charges of Leading 

Belligerents 

(In millions) 



United States. . . 
United Kingdom 

France 

Russia 

Italy 

Germany 



Year ended 


June 


30, 


1919 


March 31, 


1919 


Dec. 


31, 


1918 


Dec. 


31, 


1917 


June 


30, 


1919 


March 


31, 


1919 



Pre-war 

civil 
budget 



Interest 

charge 

last fiscal 

year 



$702.2 

987.4 

1,013.3 

1,547.1 

625.8 

851.3 



$61o.9 

1,332.6 

1,113.5 

371.2 

800.0 

1.975.0 



Revenue 
last 
fiscal 
year 



$4,647.6 
4,444.1 
1,642.5 
1,870.0 
1,492.0 
1,533.8 



It is evident from this table that in none of these 
countries except the first two were revenues sufficient 
to meet the pre-war charges for the civil budget and 
those for interest on the debt during the last year of 
the war. Both of these items, however, will be in the 
future much, higher than the figures here given. It is 
a commonplace of financial history that after every 
great war the expenditures of government, the functions 
of which have been expanded as a result of the struggle, 
never return to their former amount but remain upon a 
permanently higher level. This will undoubtedly be 
true of the countries whose budgets are here shown. In 
fact, for the next few years it may be predicted that 
they will be several times as much as the last pre-war 
budget. In the second place, the interest charges given 
in this table are considerably below the actual payments 
that will have to be met, since these do not include the 
interest on the floating debt, which in some cases is 
extremely large, or the interest on new loans now being 
issued which will swell the charges to still greater sums. 

369 



WAR COSTS AND THEIR FINANCING 

And, finally, the revenues will with difficulty be in- 
creased now that the war is over, and in some cases may 
be expected to diminish as a result of the termination of 
the war-profits taxes and other strictly war levies. 

A more adequate picture of the enormity of the debts 
that have been incurred as a result of the war will be 
furnished by a statement of the amounts of the debts 
rather than of the interest payments. If the population, 
the national wealth, and national income be also pre- 
sented, some notion will be gained of the ability of the 
various countries to cope with their existing debts. Such 
a statement is given in the following table : 

Population, Wealth, and Debts of Belligerents 
(In millions of dollars) 





Pre-war 
population 


Pre-war 
wealth 


Pre-war 
income 


Total 
debt* 


United States 

United Kingdom. . . 
France 


102,826,000 
46,499,000 
39,948,000 

141,679,000 
35,097,000 
68,442,000 
51,080,000 


$220,000 
72,500 
59,000 
60,160 
25,200 
83,250 
40,000 


$38,000 
11,250 
7,300 
6,500 
4,000 
10,500 
5,500 


$24,648 
40,385 
46 , 0'^5 


Russia . . . 


25,000 


Italy . . . 


18,758 


Germany. ... 


t49,250 


Austria-Hungary. . . 


127,000 



* As of March 31, 1920, except for Russia, in which the debt is 
of October 1, 1917. t Exclusive of indemnities. 



These figures are so stupendous that they fail to 
convey a definite impression. The mind refuses to grasp 
a figure running into a dozen digits. A more compre- 
hensible view of the burden is obtained from a statement 
of per capita debt, and such figures indicate also more 
clearly the relative burdens borne by the different 
nations. But a per capita distribution of debt alone 

370 



PROBLEMS OF CURRENCY AND DEBT 

tells, after all, very little as to the ability of the different 
nations to meet their obligations. Clearer light is thrown 
on this problem by comparing the per capita debt and 
interest charges with the per capita national wealth and 
national income, which are shown in the following table : 

Per Capita Wealth, Income, and Debts of Belligerents 





Pre-war 
wealth 


Pre-war 
income 


Present 
debt 


Present 
interest 
charge 


United States 


$2,120 

1,590 

1,515 

425 

720 

1,220 

784 


$360 
250 
190 
46 
115 
150 
105 


$240 
869 

1150 
177 
536 
720 
530 


$10 


United Kingdom 

France 


37 
63 


Russia 


3 


Italy 


26 


Germany* 


45 


Austria-Hungary* 


32 



Exclusive of indemnities. 



Conclusions based upon these tables, however, must 
be used with caution, for the statistics of population, 
wealth, and income are based upon pre-war computa- 
tions, and in practically every instance there has been 
a decline in the population while the real wealth and 
income are less to-day than they were before the war, 
although their nominal amounts have increased as a result 
of the higher price level. The debts are steadily grow- 
ing and are in almost every instance greater to-day than 
they were when these tables were compiled. So far as 
the tables err, therefore, it is in the direction of a more 
favorable showing than the present facts warrant. 

But favorable though it may be, the facts shown are 
ominous in the extreme. Will it be possible for the 
nations of Europe to carry successfully these staggering 

371 



WAR COSTS AND THEIR FINANCING 

burdens? Although it is not possible to give a cate- 
gorical answer to such a question, some light may be 
thrown upon it by a study of the probable revenues of 
the different countries. This is attempted in the follow- 
ing chapter. The ability to meet the current charges 
for debt service depends, after all, upon the revenue- 
producing capacity of the different countries. 

Although not of such immediate importance, the ques- 
tion of the ultimate disposition of the principal of the 
debt is intimately bound up with that of payment of 
the interest. Assuming that the interest charges will be 
met, are the debts likely to be paid off or will they 
remain as a permanent legacy of the war? In spite of 
the accepted policy of the United States on this point, 
the principle of debt payment is not universally 
accepted. The European and the American theories on 
the desirability of the payment of a public debt are in 
broad contrast. In general, the European theory favors 
a perpetual debt, whereas the British and American 
theory provides for the repayment of the debt. This 
distinction is clearly indicated by the maturities shown 
in the bonds issued by the different countries. Those 
for the United States and Great Britain and her colonies 
are without exception terminable at a fixed date, the 
longest maturity being 30 years. In France, Italy, 
Germany, and Hungary, on the other hand, the larger 
part of the debt was thrown into the form of a perpetual 
debt, that is, one without a fixed date of maturity. 
Russia and Austria are apparent exceptions to the rule, 
for their war debts were in every case given fixed 
maturities. 

In favor of the European theory of a perpetual 
indebtedness it is argued that the growth in population 

372 



PROBLEMS OF CURRENCY AND DEBT 

and wealth of a country gradually lessens the burden 
of a debt, which is measured by the annual interest 
charge, even though no reduction take place in the 
principal. Thus it has been computed that the pressure 
of the English debt in 1815 was equivalent to nine per 
cent, of the yearly national income. In 1880, as a result 
of the growth of national wealth, it was less than three 
per cent, although the debt had remained nearly station- 
ary in the interval. In France the capitalized sum of 
the debt increased more than threefold between 1840 
and 1870, but the pressure of the annual payments 
demanded by the debt was 0.022 and 0.023 of the 
national income for the two periods; that is to say, the 
increase in the debt was not felt as an additional burden 
because of the concomitant growth in national wealth.^ 
These and similar facts have often been cited as argu- 
ments to prove that the best as well as the easiest method 
of dealing with the public debt is to let the nation grow 
up to it. 

Another argument in favor of a perpetual debt is 
based upon the assumed burdenlessness of a domestic 
debt. If the bonds are entirely owned at home, as is 
the case in most of the war debts, the raising of taxes to 
pay interest charges, it is said, imposes no real burden 
upon the people, as the money is simply taken out of one 
pocket and put into another. This might be true up to 
a certain point if the persons who paid the taxes and 
those who received the interest payments were identical. 
But as they seldom are, there is involved in any such 
process an actual redistribution of the national income. 
Such redistribution may be beneficial, but it is more 
likely, if the lessons of history may be accepted as a 
guide, to have undesirable consequences. 

«H. C. Adams, Public Debts, p. 243. 

873 



WAR COSTS AND THEIR FINANCING 

Whatever weight such arguments may have possessed 
for European countries, they have been without effect 
in this country, where from the beginning of our history 
a policy of rapid debt payment has been traditional and 
has been carried out in practice. The population and 
wealth of the country have grown so rapidly that this 
policy has been carried through with comparatively 
little effort. It has been regarded as desirable that the 
way should be cleared for new tasks by the removal as 
speedily as possible of burdens handed down from the 
past. Such a policy seems to be called for even more 
urgently at the present time because of the growing 
demands that will undoubtedly be made upon the 
Federal Government in the future. There has long 
been evident in the United States a centralization of 
administrative functions in the Federal Government 
which has been greatly hastened by the events of the 
war. A vast growth of expenditures may be expected 
in the near future, especially as a result of the larger 
demands for social insurance, old-age pensions, improve- 
ment of internal navigation, government aid to railroads, 
and similar measures. It is desirable, therefore, to 
expunge the war debt as rapidly as possible, and leave 
the Government financially unhampered and able to 
undertake fresh duties. 

Moreover, the period immediately after the war is 
favorable for the payment of the war debt, unless the 
losses have proved excessively severe, for taxes have 
been expanded, industries are adjusted to the new taxa- 
tion requirements, and business is prospering as a result 
of higher prices. Where such conditions prevail, little 
resistance will be made to a policy of debt payment, and 
this on the whole is true of the United States. 

It is not surprising, consequently, to find a policy of 
374 



PROBLEMS OF CURRENCY AND DEBT 

rapid debt payment proposed for this country by the 
Secretary of the Treasury soon after the cessation of 
hostilities. Provision was made for the retirement of 
the war debt in the Victory Liberty Loan Act of March 
3, 1919, by the creation of a cumulative sinking fund. 
There is to be applied to the payment of the debt for 
the fiscal year beginning July 1, 1920, and for each fiscal 
year thereafter an amount equal to the sum of (1) 21/2 
per cent, of the aggregate amount of bonds and notes out- 
standing on July 1, 1920, less the par value of any obliga- 
tions of foreign Governments held by the United States 
on that date, and (2) the interest that would have been 
payable during the fiscal year for which the appropria- 
tion was made on all bonds and notes redeemed out of 
the sinking fund. Under this scheme an average of 
about $1,500,000,000 would be called for annually as 
payment into the sinking fund. If these payments were 
maintained inviolably the debt would be expunged in 
about 25 years."^ If the American people will submit 
to the continuation of taxation for debt purposes in 
such an amount, the debt could be expunged by 1947, 
when the last bonds fall due. This would be an achieve- 
ment unparalleled in the financial history of the world. 
It is earnestly to be hoped that the policy of debt pay- 
ment may be vigorously prosecuted and the process 
brought to as speedy a conclusion as possible. 

In turning from the debt situation in the United 
States to that in the various European countries, one is 
impressed with the fact that the problem there is not 
so much one of repayment of the debt as of funding 
the floating debt and of maintaining the interest pay- 

^ Hearings before the Committee on Ways and Means on the 
Fifth Liberty Bond bill, February 13 and 14, 1919, p. 59. 

375 



WAR COSTS AND THEIR FINANCING 

ments on the outstanding principal. Civil expenditures 
and systems of taxation must be adjusted to meet the 
burdens presented by the existence of this overwhelming 
indebtedness. The question is not of payment, but of 
how to avoid repudiation. Not unnaturally in the cir- 
cumstances, many proposals have been made for adjust- 
ing the debt, some of which may be briefly outlined. 

The first and most pressing problem is that of funding 
the floating debts. Practically every belligerent nation 
emerged from the war with a troublesome, and in some 
cases an almost unmanageable, floating debt. That of 
the United States is the smallest of the major powers, 
amounting on June 30, 1920, to $3,597,667,202, of which 
$2,768,927,500 represented certificates of indebtedness 
and $828,739,702 consisted of war savings certificates. 
This is a reduction of $603,471,848 from the high point 
of $4,201,139,050, which it reached on August 31, 1919. 
It was not until January, 1920, that the Treasury was 
able to reduce the floating debt to manageable amount 
and maturities.'^^ 

After that time it was able to pay off the loan 
certificates and issue in their place tax certificates 
of indebtedness which are arranged to mature at 
the dates of payment of the income and excess profits 
taxes. Assuming that Congress neither authorizes large 
new expenditures nor reduces existing taxes, it should 
be possible to clear away most of this floating debt out 
of surplus revenues by 1922 when the first Victory Notes 
fall due. 

Great Britain has various short-term obligations which 

7-a R. C. Leffingwell, " Treasury Methods of Financing the War 
in Relation to Inflation." In Proceedings of the Academy of 
Political Science in the City of 'Neio York, June, 1920, vol. ix, 
p. 17. 

376 



PROBLEMS OF CURRENCY AND DEBT 

amount to over $6,500,000,000. Some of these are pay- 
able at once and others fall due within the present year, 
but all will have to be funded into long time bonds as 
the Government cannot hope to pay them in the immedi- 
ate future. Indeed, equilibrium in the budget will be 
secured with difficulty even with the present high rates 
of taxation, and no surplus can be counted upon for 
retiring the floating debt. This consists of the following 
items :^ 



Wavs and Means advances $1,174,335,000 

Treasury bills 5,354,935,000 



$6,529,270,000 



In addition to these debts '' immediately due,'' there 
are also obligations maturing between April, 1920, and 
March, 1924, amounting to $7,340,000,000. Evidently 
the advances by the United States Government to Great 
Britain are included in this sum, but as this Govern- 
ment has the right to extend final maturity to 1938, 
this debt will probably be prolonged to that time. 

France had a floating debt of $6,600,000,000 in short 
time hons, treasury bills, oMigations, etc., most of which 
consisted of three- and six-months bills. This debt was 
of the most liquid type, as it fell due from month to 
month and therefore presented a problem of the first 
magnitude, especially in view of the fact that France 
was still borrowing to meet current expenditures. In 
January, 1920, a new loan was floated partly to fund 
this indebtedness and partly to raise needed money. 
Subscriptions amounted to $3,140,000,000, of which 
$l,600,000,000was received in cash,$l,712,000,000 in hons 
and other forms of floating debt, and the remainder in 

^Economist, June 12, 1920, p. 1281. 

377 



WAR COSTS AND THEIR FINANCING 

other securities. The floating debt of Italy amounts to 
$4,000,000,000 in short maturities. 

Germany has a truly staggering floating debt, amount- 
ing to $26,250,000,000 (105,000,000,000 marks). No 
intimation of the existence of this enormous indebted- 
ness had been given under the monarchical regime, and 
it was not until July, 1919, that the unwelcome news 
was finally broken to the German people of the accumu- 
lation of a floating debt of $18,000,000,000; since then 
it has grown steadily until on March 31, 1920, it 
amounted to the sum just named. That a float- 
ing debt of such magnitude could have accumulated is 
the strongest possible indictment of the German loan 
policy of financing the war that could be framed. Its 
amount is a measure of the insufficiency of the loans and 
shows how weak a reliance they proved themselves to 
be in the face of serious demands. This floating debt 
indicates clearly the complete breakdown of the vaunted 
German loan policy. Its funding presents an almost 
insoluble problem. ^^ Equally sinister are the floating 

8-a The total debt of Germany, on March 31, 1920, was as fol- 
lows: 
Funded : 

3 % Imperial loan (pre-war) $400,000,000 

3^2% Imperial loan (pre-war) 500.000.000 

4 % Imperial loan ( pre-war ) 250.000,000 

5 % War loans 18,100.000.000 

4%% Treasury Notes (war) 2,250.000,000 

5 % Treasury Notes (war) 500.000.000 

•Savings aiid premium loan (since Armistice) 1.000.000.000 

Total $23,000,000,000 

Floating : 

Discounted Treasury bills $22,875,000,000 

Other debts and obligations 3.375.000.000 

Total $26,250,000,000 

Grand Total $49,250,000,000 

The floating debt is reported to be increasing at the rate of 
about $750,000,000 a month. 

378 



PROBLEMS OF CURRENCY AND DEBT 

debts reported for Austria ($5,700,000,000), and Hun- 
gary ($3,780,000,000). In view of the utter financial 
collapse of these states it is difficult to see how a satis- 
factory disposition can be made of this indebtedness, 
except by some tour de force. 

In this connection it should be pointed out that the 
issues of paper money are not included in these sums, 
which are, therefore, more favorable than the reality. 
But inasmuch as the paper money issues do not bear 
interest, they present a problem of a somewhat different 
character and need not be considered at this point. 

The most extreme and the least general method of 
facing the difficulty is that of outright repudiation. This 
has been announced by the Soviet Governments of both 
Russia and Hungary. But it is by no means certain 
that these pronouncements have finally disposed of the 
debts of those countries. With the return of stable 
government it may reasonably be expected that they 
will recognize the validity of the national debt. No 
other country has suggested the repudiation of the debt. 

Although the ugly word '^ repudiation " has every- 
where been scrupulously avoided, proposals that have 
looked to a scaling down of the existing indebtedness 
have not been lacking. Of these the most discussed has 
been the plan for a capital levy. This proposal has been 
discussed in Great Britain, France, Italy, Germany, 
Austria, Holland, and Switzerland. In Great Britain 
it has been the subject of discussion for a year or more 
and was taken up in Parliament by the Chancellor of 
the Exchequer, but the plan was rejected by the Govern- 
ment as impracticable. Subsequently, however, a pro- 
posal for a levy on wealth gained during the war wrung 
'' a guarded and apparently reluctant assent " from a 
Parliamentary Committee on Increases of Wealth, and 

379 



WAR COSTS AND THEIR FINANCING 

is even now the subject of lively debate.^"^ In France 
it was accorded a less sympathetic hearing, in 
spite of its advocacy by Mr. Klotz, ]\Iinister 
of Finance, and was later declared by M. Ribot 
to be dead. From Italy came the suggestion that 
'' an extraordinary tax should be levied, divided 
in a few installments, and equalling the half of 
private patrimonies ; and in a short period the war debt 
will be liquidated without causing any harmful dis- 
turbance of values, salaries or profits, or the whole 
organization of the national economy."^ On July 10, 
1919, Minister of Finance Schanzer proposed to the 
Italian Chamber a levy on wealth of 15 per cent, to 
reduce the internal debt. This plan was discarded, how- 
ever, in favor of a heavy graduated tax on war profits. 
In Switzerland the capital levy was endorsed by the 
legislative bodies but defeated on a referendum by the 
people; the Geneva State Council, however, has under 
consideration a bill providing for a levy on capital. 
The Czecho-Slovak National Assembly has passed a 
bill providing for a levy on capital according to which 
net capital will be taxed from three per cent, on $40,000 
to 20 per cent, on $4,600,000, payable in six install- 
ments ; the announced purpose of the tax is to raise the 
value of the currency. The Budget Committee of the 
Austrian National Assembly has under consideration a 
bill which proposes a capital levy, payable partly in 
cash and partly in securities, in 20 annual installments. 
The currency stamping act of Hungary, according to 
which half of the notes presented were funded into four 
per cent, nontransferable bonds which are available 



S-h Economist, May 22, 1920, p. 1039. 

^ Achille Loria, " Italy's After-War Problems," translated from 
Nuovo Antologia in The Americas, November, 1918. 

380 



PROBLEMS OF CUHRENCY AND DEBT 

*' for payment of a capital levy," presages clearly the 
next step in the deflation and debt-reduction policy of 
tliat country. Only in G^ermany, apparently, has the 
system actually been put in force. A tax has 
been introduced in that country providing for 
a heavy capital levy under the title of '' The 
State Exigency Tribute. "^° It is imposed upon all sub- 
jects of the state, individual and corporate, and on 
foreign individuals and companies residing or doing 
business in Germany, and is levied on assets of 5,000 
marks ($1,250) and above at rates which progress from 
10 per cent, on this amount to 65 per cent, on amounts 
in excess of 100,000,000 marks ($25,000,000). The act 
provided that declarations were to be made on Decem- 
ber 31, 1919. Various allowances are made, and pay- 
ments are spread over 30 years. 

The capital levy is a plan for the conscription of 
wealth and involves a heavy imposition made once for 
all either upon all kinds of capital or upon certain speci- 
fied kinds, as, for instance, the war bonds themselves. 
The plans actually proposed have generally involved 
a levy upon all capital, and in some cases the proposal 
has been made that it should also be imposed upon the 
capitalized value of large unearned incomes. Payment 
of the tax would presumably be permitted, not only in 
money, but in Government bonds, which would then be 
cancelled. If the capital levy were made equal in 
amount to the entire public debt, the slate would be 
wiped clean by one single transaction, and further 
taxation to meet interest charges or redeem the principal 
would be unnecessary. A levy smaller in amount would 
realize these results in smaller measure. 

^° J. Jastrow. " The German Capital Levy Tax," in Quarterly 
Journal of Economics, Mav, 1920. 

381 



WAR COSTS AND THEIR FINANCING 

As a purely fiscal problem, the strongest argument in 
favor of the capital levy is that it offers a country a 
method of escape from an intolerable burden without 
the necessity of repudiation of its national debt. If a 
choice must be made between these two methods, there 
seems to be no doubt as to which is the better. Repudia- 
tion places the whole burden upon the holders of the 
national bonds. In countries where subscribers have 
been appealed to on grounds of patriotism, such an act 
would be especially abhorrent. The capital levy, on the 
other hand, will place the burden upon all owners of 
capital of whatever form and would thus distribute the 
payment equitably, on the assumption that property 
affords a measure of ability. Other arguments have 
been advanced in favor of the capital levy, but into these 
it is not possible to enter here.^^ Its advantages are 
stated thus in Pethick-Lawrence 's book: 



The effect of a levy on capital will be to wipe out the 
whole or part of the debt and to give the state a financial 
interest in certain national enterprises. It will bring about 
partial deflation. It mil not change the total aggregate of 
the wealth of the country as a whole, but will change its 
distribution. It will make it possible to balance the budget 
and reduce direct taxation. In this way business men with 
moderate incomes will find the levy much less hindrance to 
their business than the heavy income tax which will otherwise 
have to be imposed. The persons who will feel the weight 
of the levy most heavily will be the men of great wealth 
and those living without personal exertion on the proceeds 
of their investments. 

" See Eeport of the Committee on War Finance of the Ameri- 
can Btonomic Association, Supplement Xo, 2 of the American 
Economic Review, March, 1919, p. 69; F. W. Pethick-Lawrence, 
A Levy on Capital, London, 1918; A. C. Pigou, The Economy and 
Finance of the War, London, 1916. A very extensive literature 
on this subject has grown up in France and Germany during the 
past year, 

382 



PROBLEMS OP CURRENCY AND DEBT 

Although such a plan for scaling down the debt need 
not be seriously contemplated in the United States, 
wliere the war debt can be easily carried, the problem 
is quite otherwise in many of the European countries. 
With the possibility of a complete breakdown of national 
credit impending, it may even yet happen that other 
Governments will follow the lead of Germany and resort 
to this method of reducing their national burdens. The 
only alternative is heavy taxation over a long period 
of years. 

Another method of scaling down the debt would be 
by means of a compulsory reduction or postponement of 
the interest charges. Thus, Dr. Rasin, Minister of 
Finance in Czecho-Slovakia, suggested that the Austrian 
war debt bearing 5I/2 per cent, interest should be trans- 
formed into low-interest bearing bonds, say at one or 
two per cent, interest. This could easily be done, in 
his opinion, and would avert the otherwise probable 
bankruptcy of the State. As the 51/2 per cent, bonds 
are now selling at about 60 and a new two per cent, 
bond would bring about 40, the loss to the bondholder 
would be less serious than the gain to the State. 

Still another method of reducing, in part at least, the 
indebtedness of practically every European participant 
in the war on the side of the Entente Allies is for the 
United States Government to forgive the foreign Gov- 
ernments the sums advanced them during the war. This 
would mean a reduction of some $10,000,000,000 in the 
aggregate European war debt, distributed among the 
different belligerents roughly in proportion to their 
respective total indebtedness. This suggestion has 
awakened great enthusiasm wherever it has been made 
in Europe, but as yet no official notice has been taken 
of the suggestion either by foreign Governments or by 

383 



WAR COSTS AND THEIR FINANCING 

the United States.^- The Treasury Department has, 
however, arranged to postpone for three years the col- 
lection of interest on the Allied debt, and to spread the 
accumulated interest charges over a series of years. This 
arrangement provides a breathing spell during which 
the Allied governments may adjust their most pressing 
financial problems. 

In the case of nations engaged in the war, a reduction 
in their debt may be effected by the transfer of German 
indemnity bonds. Thus, Belgium is to have her war 
debt, incurred by borrowing from other Governments, 
liquidated by having German bonds substituted for 
Belgian bonds. Other nations in similar manner will be 
able to reduce their indebtedness by the substitution of 
German bonds for their o^ti. This process, however, 
is not to take place at once, and the amount that will 
be received from Germany as an indemnity is as yet 
indeterminate. The payments to be made by Germany 
other than payment in kind, surrender of territory, 

" This idea has been endorsed bv George W. Wickersham in the 
United States [Washington Post, October 21, 1918), while Senator 
Kenyon carried it to the point of otfering a resolution in Con- 
gress that the United States should cancel the financial obliga- 
tions owed this Government by France (yew York Times. May 8, 
1919). It has also been sponsored by Sir George Paish in 
England. Sir George Paish in a copyrighted interview sent to 
the New York Tribune of July 20, 1919, by its London corre- 
spondent, said he had come to conclusion that " a collapse of 
world credit is not only possible but imminent. ... I see 
only one way out and that is by capital levies, both national and 
international. I have made the suggestion that America and 
England each agree to wipe out, say, ?. thousand million [pounds 
sterling] of the debts owed them by Continental countries and 
pool an international credit in the League of Nations. My sug- 
gestion is based on the principle that it is better to iorego 
part, thus making the rest good than to force bankruptcy and 
thereby receive, say. only 50 cents on the dollar." The proposal 
has also been endorsed by J. M. Kevnes in his able and influen- 
tial book. The Economic Consequences of the Peace (pp. 260- 
282). 

384 



PROBLEMS OF CUEKENCY AND DEBT 

ships, and other forms of restitution, are shown in the 
following schedule of reparations :^^ 

1. To be issued forthwith, 20,000,000,000 marks gold bearer 
bonds, payable not later than May 1, 1921, without 
interest. . . . 

2. To be issued forthwith, further 40,000,000,000 marks 
gold bearer bonds, bearing interest at 2^/^ per cent, per 
annum between 1921 and 1926, and thereafter at five per 
cent, per annum with an additional one per cent, for amortiza- 
tion beginning in 1926 on the whole amount of the issue. 

3. To be delivered forthwith, a covering undertaking in 
WTiting to issue w^hen, but not until, the Commission is satis- 
fied that Germany can meet such interest and sinking fund 
obligations, a further instalment of 40,000,000,000 marks gold 
five per cent, bearer bonds, the time and mode of payment of 
principal and interest to be determined by the Commission. 

It is, of course, obvious that even if these indemnity 
bonds could be substituted by the Goviernments receiving 
them for their own obligations, there would be no reduc- 
tion in the aggregate debt, but merely a shifting from 
the Entente to the Central Powers. To the extent that 
the finances of the former Governments would be 
benefited, those of Germany would be injured. 

Evidently a consideration of the methods thus far 
proposed do not lead very far in the direction of the 
actual payment of the debt. It remains, therefore, to 
take up some of the problems that present themselves 
in connection with real debt payment. The first question 
that may be raised is whether the debt is of a type that 
lends itself to repayment. About one-fifth of the war 
debts are of the rente type, that is, in the form of bonds 
running at the pleasure of the Government with no 
specified date of maturity. A debt thrown into such a 

"Peace Treaty, Part VIII, Annex II, Section 12(c). 

385 



WAR COSTS AND THEIR FINANCING 

form may fairly be spoken of as a perpetual debt, as 
there is no obligation on the part of the Government to 
redeem it, and history has yet failed to record a single 
instance of a debt of this type having been paid off. 
Moreover, bonds of- this type are usually sold at a dis- 
count, and this was true of the French and Italian 
rentes. Since they are issued under par at low rates in 
order to save interest, the Government is unwilling to 
redeem them at par. With the exception of the United 
States, Australian, and New Zealand loans and most 
of the loans of Great Britain and Canada, every 
belligerent country issued its bonds below par. 

On the whole, it may be concluded that the debts of 
most of the countries are thrown into a form convenient 
for refunding or for payment. Terminable annuities, of 
which numbers were issued by Great Britain during 
the Napoleonic wars, were not used at all to finance the 
World War. Serial bonds were resorted to only in the 
case of part of four of the German loans. Both of these 
forms of obligations are objectionable during a struggle 
in which borrowing is going on continuously and on a 
large scale, since provision must be made for fixed 
annual payments from the very beginning. They thus 
impose an additional expenditure upon the Government 
at the very time when it is borrowing and when it may 
be most inconvenient to make payments. Furthermore, 
they are open to the objection that they preclude a 
refunding by which advantage may be taken of a 
possible fall in the rate of interest. They are, there- 
fore, unsuited for use in time of war. Still further 
objections may be made to the use of serial bonds by a 
national Government. A Power which may have to 
finance a war cannot afford to be hampered by the 
existence of a debt of which payment is compulsory. In 

386 



PROBLEMS OF CURRENCY AND DEBT 

this respect the effect of the serial bond is like that of 
the much over-rated sinking-fund policy in that it com- 
pels payment of the debt even when the Government is 
borrowing. And on the other hand, the serial bond 
prevents more rapid payment if happily larger surplus 
revenues make such action possible. 

The British colonies almost without exception issued 
their war loans in the form of straight-term bonds. 
Bonds of this kind have certain advantages, such as 
simplicity and the possibility of arranging their terms 
so as to have them mature like bankers' paper at dates 
convenient for repayment or refunding. On the other 
hand, they have the disadvantage that the bonds of each 
issue fall due in a large block which may necessitate 
refunding. The accumulation of a fund in advance to 
provide for their payment either by a sinking fund or 
by some other device, is neither advisable nor likely, and 
an attempt on the part of the Treasury to purchase 
them in the open market on any large scale would prob- 
ably have the effect of driving up their price. 

The '* optional " or redeemable bond has been pre- 
ferred in financing the World War, considerably over 
two-thirds of the debts now outstanding having been 
thrown into this form. The optional bond is an Ameri- 
can device, introduced at the time of the Civil War. 
Although such a bond introduces a certain element of 
complexity into the national debt, it has certain decided 
merits. Perhaps the most important of these is the 
fact that it furnishes an earnest of the intention of the 
Government to attack the payment or refunding of the 
debt as promptly as possible, a provision that has a 
beneficial effect upon the credit of the Government. It 
also gives an earlier control over the debt than would 
be secured by the issue of a straight long term bond. 

387 



WAR COSTS AND THEIR FINANCING 

The latter has probably been the factor that has led to 
the selection of this type by most of the belligerent 
Governments. With one exception (the third French 
war loan) the latest optional redemption date named is 
1931, and the great bulk of the debt is brought by this 
device within the control of the respective Governments 
within the next decade. What use they will make of 
this opportunity it will remain for the future to show. 
It is possible, of course, that, if market conditions 
prove favorable, the interest charges may be reduced 
by refunding the floating or maturing debt at lower 
rates of interest, but it is unlikely that any considerable 
savings can be effected by this method for a number of 
years. At the present writing (July, 1920) the move- 
ment of interest rates is still 'upward. 

One other feature of the obligations issued during 
this war may be mentioned. The United States and 
Canada were the only countries that specified in the 
contract that the principal and interest of the bonds 
must be paid in gold. In every other country, conse- 
quently, the service of the debt and its eventual payment 
may be discharged in the currency of that country, 
however depreciated that may be. Although no obstacle 
has been interposed in the way of the payment of the 
debt by reason of the necessity of securing gold, the 
absence of this provision may tend to prevent an early 
return to a gold basis and might even lead some 
Governments to favor further inflation with a view to 
making payment easier. 

The somewhat belated question may be raised at this 
point as to whether the Governments of the world have 
given any indication that they wish to redeem their 
debts. In candor it must be confessed that the evidence 

388 



PROBLEMS OF CURRENCY AND DEBT 

is slight. The United States is the only country that 
has as yet established a sinking fund for the amortiza- 
tion of its entire war debt. Great Britain has pro- 
vided a sinking fund for the payment of her last loan, 
which will finally be expunged by its operation in 1990. 
The French Government entered into an agreement with 
the Bank of France at the time of the extension of the 
latter 's charter by which the advances of the Bank to 
the Treasury should be redeemed at the rate of two 
per cent, per annum. Some of the Governments pro- 
vided in the laws authorizing the bond issues that the 
bonds might be used in payment of certain taxes to 
the Go^^rnment. To the extent to which bonds are 
utilized for this purpose a retirement of the debt would 
be effected. 

The all important question involved in a discussion of 
the payment of the war debt is, after all, the question, 
can the Governments of Europe pay their present 
debts ? If the history of their past record in the matter 
of debt payment be accepted as a guide to their probable 
action in the future, it may safely be asserted that they 
will not pay off the principal of these debts. They 
will prefer to let them run. The United States and 
Great, Britain alone of modern nations have ever been 
willing to reduce their national indebtedness, and they 
alone of the belligerent states have made a beginning 
in the pajnnent of the debts resulting from the war. 
The peak of the United States gross debt was reached 
on August 31, 1919, when it stood at $26,596,701,648 ; 
by June 30, 1920, it had been brought down to 
$24,299,321,467. This reduction of $2,297,380,181 was 
due in part to the application of a huge Treasury bal- 
ance of over $1,000,000,000 which had been maintained 
at a high figure during the war, and in part to the sale 

389 



WAR COSTS AND THEIR FINANCING 

of military supplies in an amount which totaled 
$760,708,222 by April 9, 1920. The high point of the 
British debt seems to have been attained on December 
31, 1919, when it stood at $10,395,000,000; on 
June 30, 1920, it was $39,225,000,000, or a reduction 
of $1,170,000,000, due, as in the United States, to the 
transfer of a Treasury balance, to the sale of military 
supplies, and to the use of surplus revenue. 

The payment of a debt can be effected only by having 
a clear surplus over expenditures. It is unlikely that any 
of the European Governments will be able for many 
years to show a surplus. They will be fortunate if by 
the strictest economy they can avoid deficits. Moreover, 
if the budgets can be brought into equilibrium and a 
surplus established, a double pressure will at once be 
manifested to prevent the application of this surplus to 
debt payment. On the one hand there will be a demand 
from the industrial classes to be relieved from burden- 
some taxation, and on the other there will be a steady 
pressure for the expansion of governmental functions 
and activities. It is altogether unlikely that any effort 
will be made to apply the revenues of the state to a 
reduction of the principal of the debt. 

In conclusion it may safely be asserted that no 
reduction in the aggregate sum of European indebted- 
ness will be effected within the next generation or two 
except by means of partial repudiation or by a capital 
levy or other methods of scaling down the debt. 
Repudiation by name will undoubtedly be avoided, but 
substantially the same result may be achieved under 
some other guise. There is, therefore, little likelihood 
of any real payment of the debts of the European 
countries. 



390 



CHAPTER XIII 

APTER-WAR PROBLEMS OF TAXATION 

Economic strength of the leading nations — The financial outlook 
in the United States — The situation in Great Britain — The 
situation in France and Italy — Germany's position — Pro- 
posed revenues of five leading nations — Probable develop- 
ment of principal taxes. 

The nations of Europe are faced with a gigantic and 
almost insuperable problem in raising the necessary 
revenues to meet the financial burdens that have come 
to them as a legacy of the World War. In estimating 
the abilities of the different countries to provide the 
necessary revenues, they must be differentiated sharply, 
for some of the countries have large reserve strength 
and will undoubtedly be able to meet their obligations, 
whereas others have probably reached the limit of their 
capacity, or possibly even exceeded it. Any estimate 
of the ability of the different nations to bring their 
budgets into equilibrium and to maintain them there 
must take into account not merely the national wealth 
of the country, but also the productivity, energy, and 
thrift of the people. The most important factors in 
such an estimate are the extent of the undeveloped 
resources of a country and the degree of industrial 
intelligence possessed by the population/ The United 
States has both in large measure; the people of Great 
Britain and Germany are intelligent and well-trained, 
but few undeveloped resources exist in either of these 
countries; the same is true of France and Italy, though 

* See H. C. Adams, The Science of Finance, p. 89. 

391 



WAR COSTS AND THEIR FINANCING 

their workmen must be rated lower in industrial capacity 
than those of the countries just named ; Russia has vast 
natural wealth, but her population possesses a low grade 
of industrial intelligence; the states of the former 
Austro-Hungarian Empire have neither of these ele- 
ments of industrial progress. The actual situation in 
the United States and the leading Eui'opean countries 
as shown in the budgets for the fiscal year ending in 
1920 may be analyzed with due consideration of these 
differences. 

The expenditures of the United States Government 
for the fiscal year ending June 30, 1919, exclusive of 
disbursements for the Post Office, amounted to $15,365,- 
362,742, and the revenue receipts to $4,6^:7,603,852. 
The expenditures for the following year, exclusive of 
public debt transactions, and on the basis of preliminary 
estimates were placed by Secretary Glass in his annual 
report of December, 1919, at $6,812,522,729,^ while the 
receipts were estimated as follows : 

Internal revenue $4,990,000,000 

Customs 275,000.000 

Sale of public land 1.250.000 

Miscellaneous 841,000.000 

Total ordinarv receipts $6,107,450,000 

Public debt receipts 1.210,556.634 

Total $7,318,006,634 

'^ In the absence of a budget system or of any 
Treasury control of governmental expenditure it is even 
more difficult to foretell the expenditures than the 
receipts of the Government.'' The receipts from taxa- 
tion, fi'om the final instalments of the Victory Liberty 
Loan, and from further issues of Treasury certificates 

'Report, p. 202. 

392 



AFTER- WAR PROBLEMS OF TAXATION 

of indebtedness would probably suffice, he thought, to 
meet the needs of the coming year. He added :^ 

I need scarcely say that the realization of these sanguine 
expectations is contingent upon the practice of the most 
rigid economy by the Government and the continuance of 
ample revenues from taxation. Such a course, accompanied 
by the practice of sober economy and wise investment by 
our people and strict avoidance of waste and speculation, 
will make it possible for the American people to respond 
to the demands to be made upon them privately for capital 
and credit by the nations of Europe. 

The actual transactions of the Treasury for the fiscal 
year ending June 30, 1920, as shown by the Treasury 
statement of that date, were receipts of $6,694,565,389 
and expenditures of $6,766,444,461, with a resulting 
deficit of $71,879,072. For the year 1921 the total 
receipts, excluding public-debt receipts, were estimated 
by Secretary Glass* in his annual report of 1919 at 
$5,420,000,000 and the expenditures at $3,535,997,985. 
As these estimates were made eight months before the 
beginning of the fiscal year to which they apply and do 
not include such items as the Government's payments 
to the railroads, little dependence can be placed upon 
them, especially on the side of expenditures. It is alto- 
gether probable, however, that, unless unforeseen appro- 
priations should be made, the Government will hereafter 
be able to meet its current expenditures out of its cur- 
rent income and even to apply a surplus to the reduction 
of the floating debt. 

In the . case of Great Britain it will probably suffice 
to contrast the last peace budget for the year ending 

^ Letter of July 25 to banks and trust companies, quoted in 
Federal Rese7ve Bulletin, August, 1919, p. 726. 
* Report, p. 204. 

393 



WAR COSTS AND THEIR FINANCING 

March 31, 191-i, with the budget passed for the year end- 
ing ]\Iarch 31, 1920. In the former the civil budget 
amounted to $864,964,84:5 and interest payments, 
including sinking-fund payments, to $122,500,000, 
giving total expenditures of $987,464,845. Against 
this the revenues amounted to $991,214,250, yielding 
a surplus of almost $4,000,000. The budget for 
1920 stands in striking contrast to this. The total 
expenditures proved to be some $8,328,865,000, of 
which the interest on the debt accounts for $1,800,- 
000,000. The remaining $6,500,000,000 was about 
equally divided between civil and war expenditures. 
Against this enormous total there were received revenues 
amounting to $5,697,855,000, to which an additional 
$1,000,000,000 was added from the sale of assets. This 
left a deficit of $1,631,010,000, which it was proposed 
to meet by further borrowing. For this purpose a new 
loan of $1,250,000,000 was voted by Parliament. It will 
be noticed that the interest payments now amount to 
more than double the total civil budget before the war, 
in addition to which the civil budget itself has been 
enormously swollen by pensions and added costs, such 
as the civil service bonus (of $20,000,000), the loans 
to Allies ($140,000,000), liabilities '' in respect of coal " 
($100,000,000), unemployment benefit ($40,000,000), 
etc. Even if it could be assumed that as a result of 
universal disarmament all military and naval expendi- 
tures would be at once discontinued. Great Britain would 
be left with a heavy burden as a result of the war. To 
meet these growing expenditures taxes have been 
imposed which before the war would have been regarded 
as unbearable. They rest now with oppressive weight 
on wealth and large incomes, the latter being taxed in 
certain circumstances as high as 67 per cent. 

394 



AFTER- WAR PROBLEMS OF TAXATION 

The budget for 1920-21 makes a much better showing 
and evidences the extent of Great Britain's financial 
recovery within the previous year. Expenditures are 
estimated at $5,920,510,000 and revenues at $7,091,- 
500,000, which is a distinct improvement over 1920 on 
both sides of the budget. If this plan is carried through 
there will be available for reduction of the debt the sum 
of $1,170,990,000. To obtain this favorable balance Mr. 
Chamberlain proposed to increase the postal and tele- 
phone rates, to raise the duties on spirits, beer, and 
wines, and on cigars, and to double the stamp duties on 
transfers and bearer securities, and on ordinary receipts. 
The income tax was left unchanged at 6s. in the pound, 
but the excess profits tax was raised from 40 to 60 per 
cent., although its abolition had been hoped for. The 
Chancellor offered, however, to leave the tax at its old 
figure if Parliament would impose a special levy on war 
wealth.^ From all these sources additional revenues of 
$383,250,000 might be expected. 

This will constitute a heavy burden, but not necessarily 
an unbearable one. New powers of productive efficiency 
have been developed among the British people during 
the war, and the ability to produce certain kinds of 
goods and to meet foreign competition in competitive 
markets has probably been heightened. Much depends 
upon the solution of labor difficulties, but it may be 
assumed that proper steps will be taken to meet the 
legitimate demands of the working classes. If the 
morale and spirit of the nation is sustained, there is no 
reason to doubt the ability of the British people to carry 
the present load of charges on the foreign debt and of 
expanded governmental activities. 

It is difficult to present an accurate statement of the 

^The Round TaUe, June, 1920, p. 626. 

395 



WAR COSTS AND THEIR FINANCING 

French situation since matters are in flux to such a 
degree that estimates change almost from day to day. 
The total ordinary expenditures for the year 1919 were 
about $3,700,000,000.6 More than half of this amount 
represents the interest charge on the debt, which it is 
estimated will amount to $2,000,000,000 yearly, includ- 
ing $100,000,000 for payments to the Bank of France 
for the redemption of the redundant bank notes. The 
Government expressed the hope that these payments 
might soon be raised to $150,000,000 a year. The debt, 
however, is steadily increasing, owing to the delay in 
imposing adequate taxation; it amounted on February 
1, 1919, to $35,000,000,000, and has now reached over 
$46,000,000,000 with no certainty that its growth has 
been finally checked. 

The budget for 1920 as adopted amounts to $9,764,- 
200,000, but the expenditure is divided into three sec- 
tions: (1) the ordinary budget comprising the normal 
expenditure of the state of $3,864,200,000; (2) the 
extraordinary budget, consisting of exceptional expendi- 
ture resulting from the war of $700,000,000; (3) a 
budget comprising the expenditure recoverable from 
the enemy under the Peace Treaty, amounting to 
$5,200,000,000. Existing taxes and other revenue 
receipts are expected to yield $2,144,800,000, leaving a 
deficit of $7,619,400,000. But to this must be added 
additional expenses for special services of $900,000,000, 
and a further sum of $750,000,000 for repaying short 
time foreign loans falling due, notably the Anglo- 
French loan in the United States. Thus the total deficit 
is brought up to over $9,000,000,000. This sum must 

® See M. Ribot's speech before tbe Chamber of Deputies, Journal 
Officiel, May 30-31, 1919, and the tax proposals of M. Klotz as 
reported in the Economist (London) June 7, 1919. 

396 



AFTER- WAR PROBLEMS OF TAXATION 

come from fresh taxes, new loans, liquidation of war 
stocks, and payment of indemnities by Germany and 
her allies/ 

From new taxes it is hoped to obtain $1,719,400,000 
and from the sale of army supplies $700,000,000, which 
together with existing revenues, will produce total 
receipts of $4,564,200,000. It is also hoped to effect 
additional economies in expenditure amounting to 
$1,600,000,000. But even if all these proposals are 
realized, there will still remain a deficit of more than 
$3,600,000,000 to be met out of further loans and Ger- 
man indemnity payments. It is evident from this expo- 
sition how dependent French finances are upon this last 
named source. 

The new taxes introduced in 1919 consisted of 
increased duties on wines, coffee, sugar, mineral water, 
and taxes on gas and electricity; increases were also 
made in the taxes on tobacco, matches, succession duties, 
registration duties, and special taxes were imposed on 
incomes and war profits. A state monopoly of petrol 
and petroleum was also established. For 1920 the 
Finance Committee of the Chamber of Deputies pro- 
pose to increase the rate of the impots cedulaires on 
income and industrial profits, to raise the maximum rate 
of the general income tax from 20 to 40 per cent., and 
to establish a super tax of 10 per cent, for bachelors ; 
but on the other hand, they plan to raise the exemption 
minimum of the general income tax from $600 to $1200 
and to increase the exemptions for children. The 
total yield from direct taxes is estimated at $276,000,- 
000. , Increases are recommended in the stamp duty on 
sales, shooting licenses, etc., in the taxes on alcohol, 
liquors, beer, cider, and wines, on playing cards and 

'Economic World, July 24, 1920, p. 127. ' 

397 



WAR COSTS AND THEIR FINANCING 

public amusements, and new duties are levied on public 
conveyances and private motors, coffee, tea, chocolate, 
chicory, glucose etc. The aggregate yield of these 
increases in indirect taxes is given as $407,600,000. The 
balance of $1,000,000,000, to make up the total of 
$1,700,000,000 from new taxation, it is hoped to obtain 
from a tax on turnover at the rate of one per cent, on 
ordinary transactions and of 10 per cent, on articles 
of luxury. This program thus calls for loans amount- 
ing to about $3,000,000,000. Subscriptions to the recent 
loan totaled $3,126,000,000, of which, however, only 
$1,360,000,000 was in new money, the balance being in 
Government securities.^ 

One of the weaknesses of the French revenue system 
has been a disinclination on the part of the French 
people to submit to direct taxes. Even during the war 
most of the taxes were indirect, the income tax not 
being levied until 1916, and then only at very low 
rates and with very high exemptions. Moreover, after 
the introduction of the income tax, there was consider- 
able delay and evasion.^ Before revenues can be made 
to equal expenditures it will be necessary to apply a 
drastic and far-reaching system of direct taxation. 

^Federal Reserve Bulletin, May, 1920, p. 491. 

® The following sentences from M. Ribot's speech of May 30, 
1919, already alluded to, throw a vivid light upon the situation: 
"Why does not the Minister ask more of the direct tax? The 
cause of this is sad enough . . . the cause is that the adminis- 
tration for direct taxation is not capable of filling the part which 
events have imposed upon it. . . . The disorder is excessive; 
the treasury losses billions. Xote also the delay. In March and 
April we received bills for the general income tax founded on the 
basis of the 1917 income. We are late by a year. The question 
of exemption must also be settled and workmen made to pay 
their income taxes. . . . Agricultural profits are not taxed — 
it is scandalous. . . . The Minister of Finance hesitates 
to increase direct taxes, but taxes on wealth and income must be 
increased." 

398 



AFTER- WAR PROBLEMS OF TAXATION 

Assuming that the increase in the debt measures the 
destruction and waste of capital during the war, it is 
clear that the enormous revenues required by the present 
budget must be obtained from a smaller taxable base. 
The destruction of property in France has been esti- 
mated at $10,000,000,000, to which may be added 
another $4,000,000,000 for shipping and cargoes.^" 
Large investments in Russia and Turkey, amounting 
possibly to $5,000,000,000, are temporarily nonproduc- 
tive and probably worthless, and those in Rumania and 
]\Iexico have lost considerably in value.^^ To replace 
the wasted capital and provide for further needs, both 
private and governmental, will require the sacrifice of 
everything nonessential and possibly even a reduction 
in the standard of living. The question of national 
solvency seems to be reduced to one of willingness to 
submit to heavier taxation. 

According to a statement by S. Nitti, the Italian 
Prime Minister,^^ the total Italian debt now amounts to 
$18,758,000,000, on which the annual interest charge may 
be placed at not less than $900,000,000. The expendi- 
tures for the civil service have trebled and are estimated 
for the year 1920 at $1,000,000,000. Other expendi- 
tures, including $150,000,000 for war liquidation pur- 
poses, are expected to bring up the total annual outlay 
to about $2,000,000,000. Against these expenditures the 
total receipts of the year 1920 were estimated at 
$1,800,000,000. For the fiscal year 1921 the expendi- 
tures are estimated at $1,900,000,000, exclusive of inter- 
est on the foreign debt or wage increases, while receipts 

^° See my " Direct and Indirect Costs of the Great World War " 
(Washington, 1919), pp. 285, 289, 290. 

" Most of the foreign investments of French citizens have been 
made in these four countries. 

^"^ Federal Reserve Bulletin, Mav, 1920, p. 489. 

399 



WAR COSTS AND THEIR FINANCING 

are put at $1,500,000,000, thus leaving a deficit of 
$400,000,000 on incomplete returns. 

The wide discrepancy between receipts and expendi- 
tures existing in 1919 and 1920 showed the need of 
radical tax reform. Accordingly a series of Royal 
decrees dated November, 1919, put a new system of tax- 
ation into effet from January 1, 1920. Formerly taxes 
were levied mainly upon land, buildings, and private 
incomes, but according to the new law capital, both 
normal and due to war profits, is also taxed. The 
original plan was to impose a capital levy, but in view 
of the stormy opposition which this aroused, it was 
modified to a compulsory loan at a nominal rate of inter- 
est. This in turn gave place to the present scheme of 
a five per cent, voluntary loan and a tax on capital. 
The loan has already brought in some $4,000,000,000, 
which is to be applied immediately to the refunding of 
the floating debt and the retirement of some of the bank 
notes issued on account of the state. 

The taxes provided for under the new system consist 
of the following: (1) an extraordinary tax on capital, 
which again is made up of (a) a tax on the increase 
in wealth due to the war, and (b) a tax on the original 
fortune existing prior to the war. Both of these are 
progressive, the rates of the first ranging from 10 per 
cent, on $4,000 to 60 per cent, on the largest fortunes, 
while the rates of the second run from 4.5 per cent, on 
$10,000 to 50 per cent, on $20,000,000; in the latter 
case the tax may be paid in annual installments over a 
period of 20 years. (2) By decree of November 24, 
1919, the taxes on land and buildings, the special war 
tax on incomes, the personal war tax, etc., were abol- 
ished and in their place were established a normal tax 
on incomes and a supplementary tax on total income, 

400 



AFTER- WAR PROBLEMS OF TAXATION 

the latter applying only to individuals with incomes 
above $900, at rates ranging from 1 to 25 per cent. 
These two taxes do not go into effect until January 1, 
1921. (3) Supplementary taxes are revised so as to 
make them more productive, the rates being raised in 
case of taxes on registration, mortgages, government 
concessions, mortmain, insurance policies, bicycles, auto- 
mobiles, and inheritances. New taxes are imposed upon 
the sales of articles of luxury and of common use, and 
upon mineral waters.^^ 

During the course of the war taxes and other revenue.^ 
in Italy were gradually screwed up to the top notch 
and now rest upon every conceivable commodity, trans- 
action, and form of realized wealth. Some of these are 
purely war measures and temporary in their nature 
and will disappear, while the desire to protect native 
industries will act to keep down or reduce customs 
revenues. A difficult, if not insoluble, problem is pre- 
sented to Italy of bringing her swollen expenditures 
and her revenues into equilibrium. The burden of taxa- 
tion upon the Italian people is already crushing, and 
it is scarcely conceivable that much more can be raised 
from this source. The fiscal situation is aggravated by 
a greatly depreciated currency and unfavorable rates 
of foreign exchange, both of which impose an additional 
burden upon Italy in meeting her foreign obligations. 
At the same time the stoppage of the tourist traffic and 
the decline of remittances from emigrants, of whom 
about 1,200,000 were recalled as reservists, as well as 
the falling off of the export trade, reduced the national 
income at the very time that expenditures were growing. 

" The Great Fiscal Reform and Rehahilitation of Italian 
Finances, 1920. Issued by the Office of Italian Minister Pleni- 
potentiary, 291 Broadway, New York City. 

401 



WAR COSTS AND THEIR FINANCING 

A considerable period will elapse before any one of 
these factors will reach pre-war proportions, and in the 
interval it is difficult to see how the Government can 
maintain its normal functions and carry the burden 
of the interest on the war debt, war pensions, and other 
charges incidental to the war without continued resort 
to credit. 

The financial situation of Germany was set forth 
candidly and in detail for the first time since the out- 
break of the war by Dr. Schiffer, Minister of Finance, 
in a memorandum presented to the National Assembly 
at Weimar in February, 1919.^^ Dr. Schiffer estimated 
that the national annual expenditures for the future 
civil budget and debt charges would be $2,500,000,000, 
as compared with $900,000,000 before the war. The 
annual expenditures of the states and the communes 
would be about $1,250,000,000, as compared with $750,- 
000,000 before the war, the difference measuring the war 
burden imposed upon the local units. The total amount 
of revenue to be raised by taxation in the future would 
therefore be $3,750,000,000, as against $1,650,000,000 
before the war. In July, 1919, Mathias Erzberger, the 
new Minister of Finance, raised these estimates consider- 
ably, and at the same time vigorously attacked the prob- 
lem of raising the necessary revenues. Tax proposals 
of the most drastic and thorough-going character were 
submitted by him and finally adopted by the National 
Assembly. Some of these went into effect at once and 
others did not become effective until 1920; some were 
permanent and others non-recurrent, so that it is dif- 
ficult to estimate their revenue-producing character. 
The following were the principal new taxes :^* 

" Vossische Zeitung, February 16, 1919. 
^* Berliner TageUatt, April 25, 1920. 

402 



AFTER- WAR PROBLEMS OF TAXATION 

(1) A war tax on the increase of wealth during the 
war, at rates ranging from 10 per cent, on $2,500 to 
100 per cent, on the excess over $100,000, with an initial 
exemption of $2,500 and various deductions, effective 
September 26, 1919. 

(2) An extraordinary war tax for the year 1919 on 
the excess of income in 1919 over that of 1914, at rates 
varying from 5 per cent, on the first $2,500 to 80 per 
cent, on $750,000. Effective September 10, 1919. 

Either of these taxes may be paid with government 
bonds. 

(3) The inheritance tax is made more severe, being 
levied both upon inheritances and upon donations to 
living persons, but fairly liberal exemptions exist. The 
rates progress according to both size of fortune and 
degree of relationship, ranging from 1 per cent, on small 
estates to near relatives to 90 per cent, on large for- 
tunes to distant heirs. Effective September 1, 1919. 

(4) Emergency sacrifice tax. This is a heavy non- 
recurring tax upon the total real and personal property 
of all persons and corporations according to their assess- 
ment of December 31, 1919. Exemption is made of 

$1,250 for a man and in the case of a married man of an 
equal additional sum for wife and each child after the 
first. The rates progress from 10 to 65 per cent., but 
payment may be spread by annual installments over a 
period of 32 to 50 years. Effective January 14, 1920.^^ 

(5) Imperial income tax, which now replaces all for- 
mer state and municipal income taxes, these latter gov- 
ernments sharing in the revenues. Effective April 14, 
1920. . 

" It is estimated that there is in Germany from $67,500,000,000 
to $70,000,000,000 worth of property which will be subject to 
this tax; and it is calculated that the Grovernment will realize 
from this source in 1920 about $562,500,000. 

403 



WAR COSTS AND THEIR FINANCING 

(6) Corporation tax. This is the income tax applied 
to corporations. Effective April 15, 1920. 

(7) Tax of 10 per cent, on the proceeds of capital, 
that is upon returns from foreign investments, and on 
domestic dividends, interest, royalties, etc. Effective 
March 31, 1920. 

(8) A property tax on the increase of wealth, cal- 
culated at intervals of three years. The rates are from 
1 to 10 per cent., with exemptions of a present for- 
tune of less than $5,000 and an increment of less than 
$1,250. Effective April 21, 1920. 

From these various sources it is hoped to obtain 
for the present fiscal year revenues amounting to 
$3,450,000,000; the customs duties are relied upon for 
$2,275,000,000, while $250,000,000 are expected from 
tobacco taxes and as much more from the new export 
duties. Altogether total revenues of about $6,250,- 
000,000 are estimated. Against this the expenditures 
are reckoned at $6,987,500,000, of which interest on the 
public debt makes up almost half or $3,100,000,000. 
But this is only the ordinary budget. In addition Dr. 
Wirth, the Minister of Finance, has submitted an extra- 
ordinary budget of $2,900,000,000, which, however, does 
not include the deficit of $3,225,000,000 attributable to 
the postal and railway administration. It does include 
a sum of $1,000,000,000 for the execution of the Peace 
Treaty, but any amounts in excess of this which Ger- 
many may be compelled to pay will call for the raising 
of additional revenues. ^^ 

Drastic as are these levies, it is clear that they will 
have to be not only continued but increased if budgetary 
equilibrium is to be at all maintained. In spite of 
the enormous burden which will thereby be imposed 

^^ Industrie und Handelszeitung, April 21, 1920. 

404 



AFTER- WAR PROBLEMS OE TAXATION 

upon the German people, there is reason to believe that 
their industrial intelligence, their habits of industry and 
thrift, and their national tenacity will enable them to 
assume and carry this burden. It will involve a sacrifice 
of all nonessentials, a probable virtual confiscation of 
all large fortunes, and possibly a temporary suspension 
of the interest payments to holders of the domestic 
debt, but ultimately even these charges will probably be 
met. 

An effort is made in the following table to present 
for the leading nations the relation of present revenues 
and expenditures to pre-war revenues and expenditures, 
their relative increase, and the per capita burden they 
constitute : 



Pre-War and Post- War Revenues and Expenditures 




Per cent. 

growth of 

present 

over 
pre-war 
revenue 


Per cent, 
growth of 
present 
over pre- 
war ex- 
penditures 


Per cent. 

which 

present 

revenues are 

of present 
expenditures 


Present 
revenue 

per 
capita 


United States. . . . 
United Kingdom. 
France 


540 
474 
158 
185 
684 


547 
743 
801 
539 
1,601 


99 
68 
22 
45 
63 


$65 
120 
51 


Italy 


51 


Germany 


91 



* By pre-war is meant the fiscal year 1914, and by present the 
year 1920. 



The United States, Germany, and Great Britain have 
increased their revenues over those of the pre-war period 
the most, but the increase in the last-named country 
has involved the greatest effort and has absorbed the 

405 



WAR COSTS AND THEIE FINANCING 

largest proportion of the national income, amounting, 
indeed, to two-fifths of the pre-war income. How heavy 
this burden is, and how much greater than that of any- 
other country, is shown by the column of per capita 
revenues. Although the United States shows the greatest 
relative increase in taxes, they constitute a relatively 
lighter burden upon the people than do those of Great 
Britain by whatever standard they are measured. There 
is still considerable financial power that could be taken 
up in further Government exactions or that may be 
devoted by private initiative to the rehabilitation and 
reconstruction of the European countries. 

France succeeded in increasing her taxes over those of 
the pre-war revenues less than any other country, and 
the per capita charge to-day is the least of those shown 
in the table. The record of Italy is only slightly bet- 
ter than that of France, judged by this standard. If, 
however, the third column, showing the percentage 
growth of present over pre-war expenditures be made 
the basis of comparison, it is evident that the growth 
of expenditures in all countries has proceeded much 
more rapidly than that of revenue. The explanation of 
the present deficits is to be found in this fact. Until 
those swollen outlays can be reduced, there is little likeli- 
hood of securing equilibrium in the budgets. The insuf- 
ficiency of the existing revenues to meet expenditures 
for the year 1920 is clearly shown in the fourth column, 
though this has already been corrected in the case of 
the two first countries for the budget of 1921. 

Germany, in spite of her misguided financial policy 
during the war, has applied herself seriously to the task 
in hand and is proposing greatly to increase her taxa- 
tion. Judged by what Great Britain has done, she has 
by no means reached the limit of her capacity as yet, 

406 



AFTER- WAR PROBLEMS OF TAXATION 

and should be able to carry still heavier burdens. In 
fact, the taxes could be made about 30 per cent, heavier 
than they now are before the per capita burden 
would be as heavy jis that borne by the British. 

That taxation will necessarily be heavier and that 
these charges will continue for many years, is evident. 
The character and incidence of the taxes to be levied 
is therefore a question of paramount importance. 
Although it is too early to say definitely just how the 
different countries will order their systems of taxation, 
certain general principles stand out with sufficient 
definiteness to permit their statement. 

Those countries that made the greatest use of taxation 
during the war were the ones that were able to develop 
direct taxes quickly and effectively. Great Britain was 
the only country that in 1914 had a well organized 
system of direct taxation. There the income tax was 
normally used to meet new demands and was easily 
t'xpanded. During the war this tax, together with the 
inheritance and excess profits taxes, formed the sheet- 
anchor of the Exchequer, about two-thirds of the total 
revenue being derived from these sources. The United 
States was saved by a hair's breadth from the fate that 
befell the other countries that relied chiefly upon indirect 
taxes for their revenues. Only in 1913 was the income 
tax made a constitutional possibility. It is difficult to 
think how the Federal Government would have financed 
its enormous war expenditures without the income tax 
and its twin, the excess profits tax. There was a rapid 
development in these two taxes and in the inheritance 
tax, even in the years preceding the entrance of the 
United States into the war, and after that event they 
became the very backbone of the revenue system. There 

407 



WAR COSTS AND THEIR FINANCING 

is no reason to suppose that these taxes, which proved 
so lucrative and, on the whole, equitable during the 
war will not continue for a time to be used to supply 
the tax revenues, scarcely less in amount, that peace de- 
mands in these two countries, though the opposition to 
the excess profits tax will probably result in its gradual 
modification if not elimination. 

The other countries depended for the most part on 
indirect taxes. In France there has always been a dis- 
inclination on the part of the taxpayers to submit to 
direct taxes. The income tax itself was first introduced 
during the war. Although Italy had an income tax 
before the war, it relied for the additional revenues 
during the struggle upon a multitude of indirect 
exactions. In Germany the income tax, as well as other 
direct taxes, belonged to the separate states, and the 
revenues of the Imperial Government were derived for 
the most part from customs duties and' other indirect 
taxes. The disadvantages of this system were recognized, 
and it would undoubtedly have been reorganized in a 
few years ; but this distribution of the sources of revenue 
was a decided weakness in a military state like Germany 
and was responsible for some of the weaknesses of her 
excessive loan policy during the war. As foreign trade 
was disorganized in all the European countries, but little 
dependence could be placed upon the returns from cus- 
toms, and to make good this deficit the Governments 
were forced to resort to a multitude of excise and 
consumption taxes. One of the striking features of war 
finance was the slight importance of customs duties as a 
source of governmental revenue; in those countries 
where they increased, as in France, the growth was of 
no fiscal significance, for it resulted from the enlarged 
purchase of war supplies on Go^^rnment account. 

408 



AFTER- WAR PROBLEMS 0¥ TAXATION 

Certain marked tendencies in direct taxation were 
developed during the war. In the first place, heavier 
burdens were placed upon realized wealth than had ever 
been dreamed of before. There was also a great develop- 
ment of the principle of progression, and rates were 
raised to unheard-of heights. The rates of the income 
tax reached 77 per cent, in the United States; and in 
Great Britain 47 1/^ per cent. The highest rates, how- 
ever, were levied not unnaturally in the war profits and 
excess profits taxes, these reaching 80 per cent, in the 
United States and Great Britain and 60 per cent, in 
France and Italy. This tax was remarkable not only 
for the height of the rates and the large yields obtained, 
but also for its universality. By the end of the war it 
was to be found in practically every European country, 
neutral as well as belligerent. 

The inheritance tax was the third of the three 
important instruments of direct taxation. A moderate 
use of this tax had been made before the war, but it 
remained for the necessities of the great struggle to 
bring about its real development. Before the war the 
highest rate imposed in any country in the world was 
25 per cent., but Germany in her recent tax proposals 
has shown the extent to which this method can be 
developed; according to these a tax of 90 per cent, will 
be imposed upon large amounts going to distant heirs. 
There is every reason to expect that large use will be 
made in other countries of this source of revenue in 
post-war finance. Indeed, as a tax for the payment of 
the debt the inheritance tax has much to recommend it. 

Tax:es on business have also become increasingly 
important and may be expected to be developed still 
further. These existed in one form or another in most 
European countries before the war. As Federal taxes, 

409 



WAK COSTS AND THEIR FINANCING 

however, they were new in the United States until the 
introduction of the corporation excise and excess profits 
taxes. The productive possibilities of these taxes have 
been shown during the war, and now, when revenue is 
needed so urgently in all the foreign belligerent States, 
so lucrative a source will not lightly be given up. It is 
not improbable that the excess profits tax in a modified 
form will persist. At any rate, the taxation of business 
profits will undoubtedly constitute an important source 
of revenue for most countries in the immediate future. 
Consumption taxes are undergoing a transformation. 
The internal excise taxes are being shifted from the 
necessities of the poor to the luxuries of the more well- 
to-do. In addition to whiskey, beer, and tobacco, which 
have always been favorite objects of taxation, other 
articles of luxurious expenditure are now being drawn 
into the net. The luxury tax, which was introduced into 
Great Britain, France, and the United States at the very 
end of the war, was belated and poorly organized. This 
tax has already been abolished in Great Britain, and the 
tax on retail sales in the United States will probably 
soon go, but the principle of taxing luxurious expendi- 
ture wiU be applied in other ways. Prohibition and the 
consequent loss of revenue from that source forced a 
solution of the difficulty in the United States. By this 
act revenues were sacrificed which in 1918 amounted to 
about $350,000,000. Wliether this deficiency will be 
made up by the introduction of new consumption taxes 
on what are commonly designated '' food luxuries," 
such as tea, coffee, cocoa, and sugar, which might be 
made to yield about $250,000,000 annually, or by a con- 
tinuance and expansion of taxes on such articles of 
luxury as automobiles, musical instruments, sporting 
goods, toilet articles, etc., is as yet not clear. Certain 

410 



1 



AFTER- WAR PROBLEMS OF TAXATION 

it is that large revenues can be obtained only from 
articles of large, general consumption. 

Customs duties are almost certain to increase. One 
of the striking results of the war has been the growth 
in nationalistic feelings and aspirations, the economic 
consequence of which is a strong recrudesence of pro- 
tectionism. The demand for protection is emphasized 
in Europe at present by the unfavorable condition of 
exchange, which has led to the complete prohibition of 
certain articles or the limitation of imports by several 
European nations. This movement, which even in free- 
trade England finds expression in Imperial preference, 
is likely to persist indefinitely. Much heavier duties on 
imports may therefore be expected, but as these will be 
levied to a considerable extent for purposes of protec- 
tion, their revenue-producing character will be rendered 
uncertain. 

Another striking financial result of the war has been 
the growth in the resort to fiscal monopolies. These had 
existed in most European countries before 1914 in one 
form or another, as tobacco in France, alcohol in Russia, 
salt in Switzerland, etc. But during the war there was 
an enormous extension of Government control over 
industry, partly for military, partly for social, and 
partly for fiscal, reasons. Although the first reason has 
disappeared, the other two still persist, especially the 
third. Governments are now reorganizing the old fiscal 
monopolies or establishing new ones in practically all 
the European countries. For this purpose the favorite 
articles are alcohol, tobacco, petroleum, matches, sugar, 
salt, and other articles of general consumption the sale 
of which can be easily controlled. Although they are 
protested by the interests whose business is interfered 
with, they are defended on the double ground of the 

411 



WAR COSTS AND THEIR FINANCING 

desirability of governmental control of industry and of 
the fiscal needs of the Treasury. 

In conclusion, it may be said that the framing of the 
revenue systems of the European States will be guided 
primarily by the urgent necessity of securing revenue, 
but the new taxes to be developed will have important 
industrial and sociaj. consequences. The burdens upon 
wealth and large incomes, whether in the form of 
returns from property or from large earning power, will 
undoubtedly be greater than they were before the war; 
indeed, it is not improbable that they will be carried 
to such a point as to bring about a slow but steady 
redistribution of wealth. In the United States these 
taxes should serve as the incentive to greater exertion, 
but in more than one of the European States there is 
danger that the burden may be so great as to repress 
initiative and thrift, and even, if they are carried to the 
extreme called for by the present budgets, to partial 
repudiation or confiscation under the guise of taxation. 



CHAPTER XIV 



THE COST OF THE WAR 



Who pays for a war — Material costs — Depletion of capital — 
The burden on future generations — Direct and indirect 
costs — Immaterial costs — Diversity of losses — Some fac- 
tors of advantage — Indefensibility of war. 

The question has frequently been raised as to who 
pays for a war, and whether it is possible to transfer 
a part of the burdens to future generations. 

The material cost of a war is measured by the 
resources used up in the prosecution of the war, whether 
they are devoted to this end by the war-waging" coun- 
tries themselves or whether they are destroyed by the 
enemy. It is true that food must be consumed and shells 
exploded to-day and not in future years. A war must 
be fought with goods produced at the time. But to say 
this does not imply that the burden of war may not be 
shared by future generations. If all the war expendi- 
tures were met out of current production, either by 
enlarging the national output, or by economies in 
personal consumption, or by non-investment of capital 
in industries not contributing to the prosecution of the 
war, or by all three methods, then the whole cost of the 
war would be borne by the people who waged it. At 
the end of the struggle all the bills would have been 
paid. But such a pay-as-you-go policy was manifestly 
impossible in the "World War. The costs equalled the 
total annual national pre-war income of many of the 
belligerents, and in some cases even exceeded it. 

413 



WAR COSTS AND THEIR FINANCING 

In cases where the money cost of the war exceeded the 
surplus beyond the minimum needs of the people for 
subsistence, it is evident that it was necessary to resort 
to the savings of the nation and to use up accumulated 
capital itself. To the extent to which existing capital 
was reduced, either directly by being used for war pur- 
poses or indirectly through lack of provision for 
depreciation and obsolescence, and the usual savings 
thereby prevented, the economic position of the nation 
was rendered worse than before the war. As a result 
of the impairment of the capital fund, the ability to 
produce is lessened. Future generations will in such a 
case receive a depleted heritage of capital. Until this 
is made good, if indeed it can be, future generations will 
share the burden of the war and will as a result have a 
lower standard of living than they otherwise would have 
enjoyed. In addition to this indirect cost, they will also 
be saddled with an enormous load of pensions, interest 
on the foreign debt, and other charges which result 
directly from the war. In these two ways they will feel 
and share its burden. 

The issue of bonds which mature at a date more or 
less remote does not alter the essential facts. This is 
simply the method by which the Government secures 
title to goods and command over services, A war might 
be financed by bond issues and yet be borne entirely by 
the generation that waged the war if they increased 
the national income by an amount equal to the cost of 
the war or saved it out of nonessential expenditure. 
Bond issues constitute a device for distributing the 
burden among the people of the warring countries. 
Since, however, the issue of bonds does not exercise the 
same pressure to save a^ does the imposition of taxation, 
or stimulate in the same degree to greater exertion, there 

414 



THE COST OF THE "WAR 

is apt to be a greater using up of capital if large 
resort is had to this method. By as much as the exist- 
ing capital fund is reduced, succeeding generations will 
suffer an economic loss, and to that extent may be said to 
pay for the war. 

In this connection there is a certain analogy between 
the situation of an individual and that of a nation. An 
unusual and unexpected expenditure in a family, 
caused, let us say, by a sudden accident to one of its 
members, may be met by the extra effort of the bread- 
winner, by overtime work, or by unusual personal 
economies. Or, on the other hand, no change may be 
made in the ordinary expenditures of the family, but 
the whole of the extra sum to meet the new financial 
burden may be borrowed. In the former case the end 
of the convalesence of the injured one finds the family 
in the same economic position as it enjoyed before the 
accident, although for a time they have endured extra- 
ordinary sacrifices. In the latter case they will have 
to devote their energies for many years in the future 
to paying off the debt. 

It is impossible to say to what extent the burden of 
the war has been thrown on future generations. The 
amount must be very large, for practically every nation 
has emerged from the struggle with impaired resources. 
Later in this chapter an attempt is made to estimate 
.in very general terms the amount of damage and loss 
which was suffered by all the belligerent nations and by 
those neutral countries that were most directly affected 
by the war. Speculative as any such estimate must be, 
it is equally difficult to ascertain the extent to which the 
war was paid for out of current savings and enlarged 
production. In general it may fairly be concluded that 
this can be measured by the amount of taxation collected 

415 



WAR COSTS AND THEIR FINANCING' 

in each country. Such a conchision would have to be 
modified in the case of the devastated countries, where 
the diversion of wealth to war purposes would be 
measured by the amount of destruction inflicted by the 
enemy, rather than by taxation. In those regions 
enforced economies which went to the extent of dire 
privation were practiced. But unhappily the destruc- 
tion of their capital prevented the residents of these 
districts from putting forth any extra efforts towards 
production. 

The payment of the debt does not mean a loss to the 
nation if the debt is held internally. The real loss 
occurred when the money was spent. Debt payment is 
a problem in distribution. The war has indeed been 
paid for, but a subsequent reassessment of expenses is 
made by taxation. If this assessment is just, that is, 
if the system of post-war taxation is equitable as between 
income groups, then no evil effects in the distribution of 
the national income will follow. But if the system is 
so arranged as to transfer wealth from the less well-to- 
do to the rich, bonanolaing class, serious injustice may 
result. It is all-important that there should be a fair 
apportionment of taxation as between the richer and 
the poorer classes. 

An attempt has been made in the earlier chapters of 
this volume to estimate the direct money cost of the 
war, and the conclusion was reached that this amounted 
in round numbers to $186,000,000,000. This estimate 
did not take into account the indirect costs, such as the 
loss of human life, the destruction of property, the 
depreciation of capital, the loss of production, the inter- 
ruption to trade, and similar items. Another study by 
the present writer attempts to estimate these varied 
factors and to reduce them to a common money 

416 



THE COST OF THE WAR 

standard. The following summary statement is taken 
from that book :^ 

In conclusion, an attempt may be made to bring together 
the scattered data of this study into one final comprehensive 
picture which shall show the total cost of the war. The 
direct costs were estimated at $186,333,637,097. The indirect 
costs are now seen to have amounted to almost as much 
more. The combined direct and indirect costs are set forth 
by the principal items in the following table : 

Direct and Indirect Costs of the World War 

Total direct costs, net $186,333,637,097 

Indirect costs: 

Capitalized value of human life: / 

Soldiers* $33,551,276,280 } 

Civilian 33,551,276,280 \ 

Property losses: 

On land 29,960,000,000 

Shipping and cargo 6,800,000,000 

Loss of production 45.000,000.000 

War relief 1,000,000,000 

Loss to neutrals 1,750,000,000 

$151,612,542,560 
Total indirect costs 151,612,542,560 



Grand total $337,946,179,657 

* No attempt has been made to place a money value on the 
injuries done to crippled soldiers and the invalided and devital- 
ized army and civilian population. If this were included the 
totals would be considerably increased. 

Stupendous as are the figures just given, they fail 
properly to set forth all the losses involved in war. The 
losses of human life and the sufferings and privations 
represented by the destruction of property and loss 
of production cannot be reduced to a money standard 
without losing their real meaning. Nor do statistics of 
war debts measure accurately the burdens of the future. 

^ " Direct and Indirect Costs of the Great World War " 
(Carnegie Endowment for International Peace, 1919), p. 299. 

417 



WAR COSTS AND THEIR FINANCING 

The really serious burdens of the war cannot be reduced 
to statistics or presented in tabular form. Material 
resources can be replaced in a comparatively short space 
of time,^ but the immaterial intangible losses and 
burdens may persist for generations. The physical 
deterioration in the population as a result of the death 
of the fittest males has been attested for past wars by 
more than one writer,^ and since the loss of life was so 
enormous in the World War, amounting to about 
13,000,000 for soldiers and as many more for civilians, 
there is every reason to expect a serious lowering of 
racial vitality and of personal vigor throughout the 
major part of Europe. 

It is almost impossible to enumerate all of the other 
manifold items which constitute the real burden of the 
war, but a rough analysis of the principal losses and 
burdens may be given. Such a classification would 
cover the following points: (1) the loss of men through 
death and disablement; (2) the reduction of national 
physical vitality as a result of privation, overwork, 
anxiety, strain, etc.; (3) the loss of capital and 
resources through actual destruction, di^^rsion to war 
purposes, deterioration, depreciation, etc.; (4) the loss 

* John Stuart Mill, speaking of the recuperative power of a 
country after war, says : " \Yhat the enemy has destroyed would 
have been consumed in a little time by the inhabitants them- 
selves. . . . Nothing is changed, except that during the period 
of reproduction they' have not now the advantage of consuming 
what had been produced previously. The possibility of a rapid 
repair of their disasters mainly depends upon whether the country 
has been depopulated." Principles of PoUtical Economy, Book I, 
V, Sec. 7, Ashley's ed.. p. 74. 

^D. S. Jordan, The Blood of the Nation: a Study of the Decay 
of Races through the Survival of the Unfit (Boston, 1910) and 
War and the Breed: the Relation of War to the Downfall of 
Nations (Boston, 1915); V. L. Kellogg, Eugenics and Militarism 
(London, 1912) and Military Selection and Race Deterioration 
(Oxford, 1916). 

418 



THE COST OF THE WAR 

of production through the withdrawal of men from 
normal production, lowered efficiency, poorer tools, 
scarcity of raw materials, unemployment; (5) the extent 
to which the country has mortgaged the future by bor- 
rowing abroad. And even this list does not include the 
imponderable evils such as the lowering of ethical 
standards, the destruction of approved social mores, and 
in some instances, it would seem, from events of recent 
history, the very undermining of modern industrial 
institutions. 

On the other hand, certain offsets may be mentioned 
which reduce to a certain extent the evil effects of the 
factors just described. Just as a fire sometimes sweeps 
away ramshackle buildings or clears out a slum district 
which inertia or ignorance has maintained, so a war 
jostles people out of old habits, calls for new methods 
of production and organization, and teaches lessons of 
cooperation and common social purposes. The produc- 
tive capacity of a nation may even be increased, in spite 
of loss of life and material resources, as a result of 
changes wrought by war. Lloyd-George is responsible 
for the statement, made, to be sure, comparatively early 
in the struggle (1916), that improvements in industry 
and the more effective control of the liquor industry 
resulting from the war, would compensate for all 
economic losses. An almost invariable economic accom- 
paniment and aftermath of previous wars, moreover, 
has been a quickening of inventive genius. Labor-saving 
machinery and more efficient methods of production 
have been substituted in many parts of Europe for 
antiquated and inefficient processes. The movement 
toward the greater democratization of industry, which, 
like most popular movements, has at first revealed its 
most radical and even dangerous possibilities, will prob- 

419 



WAR COSTS AND THEIR FINANCING 

ably in the long run be counted as a step forward in 
the slow march toward social justice. 

But after all allowances have been made, the net 
result is one Gf indescribably heavy burdens and losses. 
No more serious indictment of war can be made than the 
impartial cataloguing of its costs. The economic and 
financial indefensibility of war has been abundantly set 
forth, it is hoped, in the previous pages of this book. 
For one who has studied its effects there can be no more 
fervent prayer than that a repetition of similar events 
may be rendered unlikely, if not impossible, for all time. 
It may not be possible wholly to abolish war, but it is 
unlikely that the nations of the world will ever again 
be plunged into a world struggle except in defense of 
some common ideal of international justice. To the 
principle of international arbitration, administered by 
some such organization as a League of Nations, as dis- 
tinguished from the appeal to force in the settlement of 
international difficulties, all thinking men must sub- 
scribe. War, as a method of determining international 
rivalries, stands condemned on many counts, but on 
none more decisively than on that of cost. 



APPENDICES 



APPENDIX I 

BRITISH MORATORIUM PROCLAMATIONS 

1. Proclamation Postponing Payment of Bills of Ex- 
CHANGE, August 2, 1914 

. . . If on the presentation for payment of a bill of 
exchange, other than a cheque or bill on demand, which has 
been accepted before the beginning of the fourth day of 
August, nineteen hundred and fourteen, the acceptor re-accepts 
the bill by a declaration on the face of the bill in the form 
set out hereunder, that bill shall, for all purposes, including 
the liability of any draiver or indorser or any party thereto, 
be deemed to be due and be payable on a date one calendar 
month after the date of its original maturity, and to be a 
bill for the original amount thereof increased by the amount 
of interest thereon calculated from the date of re-acceptance 
to the new date of payment at the Bank of England rate 
current on the date of re-acceptance of the Bill. 

Form : Re-accepted under Proclamation for £ 

(insert increased sum). 

Signature 

Date 

2. Proclamation of August 6, 1914 
Save as hereinafter provided, all payments which have 
become due and payable before the date of this Proclamation, 
or which will become due and payable on any day before 
the beginning of the Fourth day of September, nineteen 
hundred and fourteen, in respect of any bill of exchange 
(being a cheque or bill on demand) which was drawn before 
the beginning of the Fourth day of Augusst, nineteen hundred 
and fourteen, or in respect of any negotiable instrument (not 
being a bill of exchange) dated before that time or in respect 
of any contract made before that time, shall be deemed to 
be due and payable on a day one calendar month after the 

423 



WAR COSTS AND THEIR FINANCING 

day on wliicli tlie payment originally became due and pay- 
able, or on the Fourth day of September, nineteen hundred 
and fourteen, whichever is the later date, instead of on the 
day on which the payment originally became due; but pay- 
ments so postponed shall, if not otherwise carrying interest, 
and if specific demand is made for payment and payment is 
refused, carry interest until payment as from the Fourth day 
of August, nineteen hundred and fourteen, if they become 
due and payable before that day, and as from the date on 
which they become due and payable if they become due and 
payable on or after that day, at the Bank of England rate 
current on the Seventh day of August, nineteen hundred and 
fourteen ; but nothing in this Proclamation shall prevent pay- 
ments being made before the expiration of the month for 
which they are so postponed. 

This proclamation shall not apply to: 

(1) any pa^Tnent in resjDect of wages or salary; 

(2) any paj^ment in respect of a liability which when in- 
curred did not exceed five pounds in amount; 

(3) Any payment in respect of rates or taxes; 

(4) any payment in respect of maritime freight; 

(5) any payment in respect of any debt from any person 
resident outside the British Islands, or from any firm, 
company or institution whose principal place of business 
is outside the British Islands not being a debt incun-ed 
in the British Islands by a person, firm, company, or 
institution having a business establishment or branch 
business establishment in the British Islands; 

(6) any pajTnent in respect of any dividend or interest 
payable in respect of any stocks, funds, or securities 
(other than real or heritable securities in which trustees, 
are, under Section One of the Trustee Act, 1893, or any 
other Act for the time being in force, authorized to 
invest ; 

(7) any liability of a bank of issue in respect of bank 
notes issued by that bank; 

(8) any payment to be made by or on behalf of His 
Majesty or any Government Department, including the 
payment of old age pensions; 

(9) any payment to be made by any person or society in 
pursuance of the National Insurance Act, 1911, or anv 

424 



BRITISH MORATORIUM PROCLAMATIONS 

Act amending that Act (whether in the nature of contri- 
butions, benefits, or otherwise) ; 

(10) any payment under the Workmen's Compensation Act, 
1906, or any Act amending the same; 

(11) any payment in respect of the withdrawal of a deposit 
by a depositor in a trustee savings bank. 

Nothing in this Proclamation shall affect any bills of ex- 
change to which Our Proclamation dated the Second day of 
August, nineteen hundred and fourteen, relating to the post- 
ponement of payment of certain bills of exchange applies. 

3. Proclamation of August 12, 1914 
Nothwithstanding anything contained in the Proclamation, 

dated the sixth day of August, nineteen hundred and fourteen 
relating 'to the postponement of payments), that Proclamation 
shall apply, and shall be deemed always to have applied: 
(a) to any bill of exchange which has not been re-accepted 
under Our Proclamation, dated the second day of August, 
nineteen hundred and fourteen, as it applies to a bill of 
exchange, being a cheque or bill on demand, unless on the 
presentation of the bill the acceptor has expressly refused 
re-acceptance thereof, but with the substitution, as re- 
spects rate of interest, of the date of the presentation 
of the bill for the seventh day of August, nineteen hun- 
dred and fourteen; and 
(&) also to payments in respect of any debt from any 
bank whose principal place of business is in any part 
of His Majesty's Dominions or any British Protectorate, 
although the debt was not incurred in the British Islands 
and the bank had not a business establishment or branch 
business establishment in the British Islands. 

4. Proclamation of September 3, 1914 

1. If on the presentation for payment of a bill of exchange 
which has before the fourth day of September, nineteen 
hundred and fourteen, been re-accepted under the terms of 
Our said Proclamation, dated the second day of August, 
nineteen hundred and fourteen, the bill is not paid, then, 
the said Proclamation shall, in its application to that bill, 
have effect as if the period of two calendar months had been 

425 



WAR COSTS AND THEIR FINANCING 

in the Proclamation substituted for the period of one calendar 
month, and the sum mentioned in the form of re-acceptance 
under the said Proclamation shall be deemed to be increased 
by the amount of interest on the original amount of the bill 
for one calendar month calculated at the Bank of England 
rate current on the date when the bill is so presented for 
payment as aforesaid. 

2. Our said Proclamation, dated the sixth day of August, 
nineteen hundred and fourteen, as extended b}^ Our said 
Proclamation, dated the twelfth day of August, nineteen hun- 
dred and fourteen, shall ai^ply to paj-ments which become 
due and payable on or after the fourth day of September 
and before the fourth day of October, nineteen hundred and 
fourteen (whether they become so due and paj^able bj' virtue 
of the said Proclamations or otherwise) in like manner as it 
applies to payments which became due and payable after the 
date of the said first mentioned Proclamation and before the 
beginning of the fourth day of SeiDtember, nineteen hundred 
and fourteen. 

3. Xothing in this Proclamation shall effect the payment 
of interest under the Proclamation extended thereby, or pre- 
vent payments being made before the expiration of the period 
for which they are postponed. 

5. Proclamatiox of September 30, 1919 
1. The first General Proclamation as extended by paragraph 
(b) of the Second General Proclamation shall, subject to the 
limitations of this Proclamation, appty to payments which be- 
come due and payable on or after the fourth day of October 
and before the fourth day of November, nineteen hundred and 
fourteen (whether the}' so become due and payable by virtue 
of the said Proclamations or the third General Proclamation 
or otherwise), in like manner as it applies to payments which 
become due and payable after the date of the first General 
Proclamation and before the beginning of the fourth day of 
September, nineteen hundred and fourteen. 

Provided that, if the paj^ment is one the date whereof has 
been postponed by virtue of any of the said General Proclama- 
tions, and is one which carries interest either by virtue of the 
terms of the contract or instniment under which it is due and 
payable or by virtue of the said General Proclamations, then 

426 



BRITISH MORATORIUM PROCLAMATIONS 

the person from whom the payment is due shall not be 
entitled to claim the benefit of this Article unless, within 
three days after the date to which the payment has been 
postponed by virtue of the said General Proclamations, all 
interest thereon up to that date is paid. 
This Article shall not apply to: 

(a) Any payment in respect to rent; 

(b) Any payment due and payable to or by a retail trader 
in respect to his business as such trader. 

2. The Bills (Re-acceptance) Proclamation shall continue 
to apply to bills of exchange (other than cheques and bills 
on demand) accepted before the beginning of the fourth day 
of August nineteen hundred and fourteen, the date of the 
original maturity whereof is after the third day of October. 

If on the presentation for payment of any such bill the bill 
is not paid and is not reaccepted under the said Proclamation, 
then, unless on such presentation the acceptor has expressly 
refused re-acceptance thereof, the bill shall for all purposes, 
including the liability of any drawer and indorser or any 
other party thereto, be deemed to be due and payable on a 
date one calendar month after the date of its original maturity 
instead of on the date of its original maturity, and to be a 
bill for the original amount thereof increased by the amount 
of interest thereon, calculated from the date of the original 
maturity to the date of payment at the Bank of England 
rate current on the date of its original maturity, and para- 
graph (a) of the second General Proclamation shall not apply 
to any such bill. 

3. If on the presentation for payment of a bill of exchange, 
the date of maturity of which has before the fourth daj^ of 
October nineteen hundred and fourteen become postponed 
either by virtue of the Bills (Re-acceptance) Proclamation or 
paragraph (a) of the second General Proclamation (whether 
or not the date of maturity has been further postponed by 
virtue of the third General Proclamation), the bill is not 
paid, then the date of maturity shall be deemed to be further 
postponed for fourteen days from the date of such presentation 
for payment, and the original amount of the bill shall be 
deemed to be further increased by the amount of interest on 
the original amount of the bill for fourteen days, calculated 

427 



WAR COSTS AND THEIR FINANCING 

at the Bank of England rate current on the date of such 
presentation for payment. 

4. Save as otherwise expressly provided, nothing in this 
Proclamation shall affect the application of the General 
Proclamations to payments to which those Proclamations 
apply, and nothing in this Proclamation shall prevent pay- 
ments to which this Proclamation applies being made before 
the exjoiration of the period for which they are postponed 
thereunder. 



APPENDIX II 



FRENCH MORATORIUM DECREES" 

On July 29, 1914, the first moratorium was decreed. 
The maturity of obligations entered into before August 
1, 1914, and falling due after that date or before 
August 15, 1914, was postponed 30 days. 

On August 2, 1914, the above decree was applied to 
deposits in banks and institutions of credit : if less than 
250 francs, the whole could be drawn ; if more than that 
sum, only five per cent, of the excess, in addition to 250 
francs; commercial or industrial employers of labor 
could draw the whole for wages; and the decree was 
applied to savings and insurance contracts. 

These two early decrees were completed by that of 
August 9, 1914, which follows: 

Decree of August 9, 1914 

Art. 1. For all negotiable instruments falling due after 
July 31, 1914, inclusively, or maturing before September 1, 
1914, the date of payment is delayed thirty days, on condition 
that they were underwritten previous to August 4, 1914. 

The negotiable instruments in the view of the present 
article are: bills of exchange; notes to order, or to bearer; 
checks, with the exception of those presented by the drawer 
himself; orders and warrants. 

Not falling under the application of the present article 
are negotiable instruments issued upon the public Treasury. 

Art. 2. [Applies to commitments for merchandise entered 
into before August 4, 1914.] 

Art. S. [Applies likewise to advances on movables.] 

Art. If.. [Applies to demands for deposits, except up to 
250 francs, plus five per cent., etc.; not to demands for 

* Printed in J. L. Laughlin, Credit of the Nations (1918), 
p. 369. 

429 



WAR COSTS AND THEIR FINANCING 

paving labor; not to those whose establishments have been 
requisitioned, etc.] 

. Art. 5. The postponement of thirty days dating from 
August 1, 1914, is ai^plicable to the redemption of obligations 
or contracts of insurance, of capitalisation or savings for 
fixed terms, or those stipulated to be redeemable at the will 
of the OAvner or bearer. 

On August 10, 1914, all prescriptions and limitations, 
civil, commercial, or administrative were suspended until 
the end of the war. They were further treated by the 
decree of December 16, 1914, and modified by that of 
May 12, 1915. 

The main moratorium of August 9 was given more in 
detail on August 29, 1914, and extended until October 1, 
1914. On the same day, a decree suspended payments 
on obligations of departments, communes, etc., until the 
end of the war. 

From time to time the moratorium was extended by 
many decrees as follows : 

September 27, 1914, 30 davs to November 1, 1914 
October 27, 1914, 60 days to January 1, 1915 
December 15, 1914, 60 davs to March 1, 1915 
February 25, 1915, 60 days to May 1, 1915 

April 15, 1915, 90 days to August 1, 1915 

June 24, 1915, 90 days to November 1, 1915 

October 16, 1915, 60 days to January 1, 1916 
December 23, 1915, 90 days to April 1, 1916 

March 18, 1916, 90 days to July 1, 1916 

June 24, 1916, 90 days to October 1, 1916 

September 20, 1916, 90 days to January 1, 1917 

Out of a total of 4,480 million francs in August, 1914, 
postponed at the Bank of France (from which should 
be deducted 800 millions for those under the colors or 
in territory occupied by the enemy) the amount remain- 
ing December 14, 1916, was only 1,346 millions. Suc- 
cessful efforts had been made to have postponed debts 
paid up, and in December, 1916, practically no delay 

430 



FRENCH MORATORIUM DECREES 

was granted unless gooc ^ause could be shown to a 
Thereafter moratorium decrees ceased. 

Decree of September 27, 1914, Concerning Transactions 
IN Securities 

Art. 1. Provisionally suspended are all demands for pay- 
ments and all judicial actions relative to the sale and purchase 
in the period previous to August 4, 1914, of rentes, public 
securities, and other transferable instruments, as well as the 
dealings for carrying them forward. 

The sums due by reason of these sales, purchases, and 
carrying charges should be increased by interest for the 
time of postponement at the rate of five per cent, per annum. 

This decree was modified by that of September 14, 
1915, which brought pressure on all not under the colors 
or in occupied territory to make payment of 10 per cent, 
of differences due in settlements, and 6 per cent, on 
delayed payments. 



APPENDIX in 

ACT PROVIDIXG FOR GER31AN LOAX OFFICES^ 



Daelehxskassex Act ( Retch sgesetzbl., P. 340) August 4, 

1914 

1. In Berlin and those places witliin tlie Emi^ire, in which 
there is a branch or agency of the Reichsbank, shall be estab- 
lished wherever necessary, on the order of the Imperial 
Chancellor, according to the report of the Committee on Trade 
and Commerce of the Federal Council {Bundesratli), Loan 
Bureaus {DarJehuskassen) for the pui'pose of making loans 
on security to meet the need of credit, especially in the 
interest of trade and industry. 

Subsidiary branches of the Darlehnskassen may be estab- 
tablished in other than the designated places to aid in the 
work of lending and of building up depots. 

2. For the full amount of the loan granted shall be paid 
out of a si^ecial form of money known as " DarJehnskassen- 
scheine." These notes shall be received at their fuU face 
value in jDayment at all the Imperial offices as well as at all 
the public offices of the States of the Emj^ire ; in private trans- 
actions they shall not be a compulsory means of payment. 

In the meaning of paragraphs 9, 17 and 44 of the Bank 
Act of March 14, 1875, the notes of the Loan Bureaus stand 
on the same footing as the Beicliskassenscheine (Imperial 
Treasury notes). 

The total amount of the notes of the Loan Bureaus shall 
not exceed 1500 million marks. The Federal Council is 
empowered in case of necessity to raise the amount of notes 
outstanding. 

Xo notes of Loan Bureaus shall be issued by the manage- 
ment of the Loan Bureaus (paragraph 13) for which sufficient 
secnrity, as fixed by paragraphs 4 and 6, shall not be provided. 

* Printed in J. L. Laughlin, Credit of the Satiom (1918), 
p. 384. 

432 



ACT PROVIDING FOR GERMAN LOAN OFFICES 

Before tlieir issue, an exact description of the notes shall 
be made public by the management of the Loan Bureau. 

3. Loans can be given for not less than 100 marks, and 
shall not run as a rule for a longer term than three, and only 
in exceptional circumstances for six, months. 

4. The security may consist of : 

(a) The pledge of industrial, agricultural and mineral 
products and non-perishable merchandise, stored within the 
limits of the Empire, as a rule, for one-half, or in exceptional 
cases, for two-thirds of their value, according to differences 
of circumstances and salability. 

(h) The pledge of securities issued by the Empire, or by 
the government of a German State, or those conforming to 
legal requirements issued by corporations, joint-stock com- 
panies, or limited partnerships, which are located within the 
Empire, at a reduction from their current or market price. 
Paper not running in the name of the bearer must be trans- 
ferred to the Loan Bureaus. 

(c) The pledge of other securities which the management 
(paragraph 13) declare to be satisfactory. 

For the fulfillment of the pledge of articles mentioned in 
[a) it suffices, instead of actual delivery, to indicate the pledge 
clearly by some external mark, such as a tablet or the like. 

C. Commodities which are subject to serious changes of 
price will be accepted as pledge only if a third solvent person 
guarantees the payment of the loan. 

6. A loan may also be protected by the pledge of claims, 
which have been entered in the Imperial Debt Records 
(Reichsschuldbuch) or in that of a German State, at a reduc- 
tion from the current value determined according to the face 
value and the rate of interest of the obligations corresponding 
to the pledged claims. 

. In case a mortgage on a claim of the sort mentioned in the 
first paragraph be inscribed on the records in favor of the 
Loan Bureau, it is sufficient to have the attestation of two 
members of the Board of Directors. 

As to the attestation, the regulations of paragraph 183 of 
the Act concerning matters of voluntary jurisdiction have like 
application. 

7. If a mortgage to a Loan Bureau has been entered on 
the records (paragraph 6), the Bureau thereby acquires a 

433 



WAR COSTS AND THEIR FINANCING 

right, even if a third person has a claim on it, prior to the 
rights of that third person unless the right of the third person 
had been entered at the time of the inscription of the mortgage 
on the records; or was known at that time to the Bureau; or 
was not known because of gross negligence. 

If the debtor has delayed meeting the obligation secured 
by the pledge, the Administration of Debt Records is thereby 
empowered and obliged, on a written request of the Loan 
Bureau, without requiring any proof of the delay, to issue 
obligations payable to bearer to liquidate the whole or a 
corresponding part of the claim; unless an order of the 
court intei^^enes which forbids the payment to the Loan 
Bureau ; or unless some right of a third person, or a limitation 
of the mortgage in favor of the third person has been 
recorded, which w^as entered earlier than the pledge in favor 
of the Loan Bureau. 

The Administration of the Records must inform the Loan 
Bureau of later entries affecting the adequacy of the 
obligation. 

As to the satisfaction of the Loan Bureau regarding the 
obligations discharged by the Administration of the Debt 
Records, the regulations of paragraphs 10, 11 have corre- 
sponding application. 

8. The rate of interest on a loan granted shall as a rule not 
be higher than the published rate at which the Reichsbank 
buys bills of exchange. 

9. The security should suffice for the principal, interest, and 
expenses ; these secondar j^ claims should be deducted from the 
sum of the loan. 

10. If payment is not made at maturity, the Loan Bureau 
may sell the security through one of its officials or a broker 
and reimburse itself out of the proceeds. The Loan Bureau 
shall dispose of the security only to the highest bidder in the 
open market. 

11. Also, if the debtor should go into bankruptcy, the Loan 
Bureau retains the right to sell the security A\^thout an order 
of the Court. (Paragraph 127, Sec. 2, of the Bankruptcy 
Act of May 20, 1898, does not apply.) 

12. The Loan Bureaus form independent institutions with 
the attributes and rights of a legal persona. Their business 
enjoys freedom from stamps and duties. 

434 



ACT PROVIDING FOR GERMAN LOAN OFFICES 

13. The Reichsbank assumes the management of the Loan 
Bureaus under the direction of the Imperial Chancellor in 
the interest of the Eminre, but quite apart from its other 
business. The general administration shall be established in 
Berlin in a special bank department known as the 
'' Hauptvericcdtu)>g cler Darlehnskassen '' according to more 
detailed directions given by the Imperial Chancellor. In addi- 
tion, there shall be appointed for each Loan Bureau a Special 
Board of Directors subordinate to the Ilcmptverwaltung, to 
which shall be appointed by the Imperial Chancellor a repre- 
sentative of the Empire as Avell as members from the com- 
mercial or industrial classes. The Imperial Chancellor issues 
instructions for the conduct of the business of the Loan 
Bureaus. 

14. The opening of the Loan Bureaus is to be brought to 
general attention over the names of the Imperial representa- 
tive and the members of the Board of Directors through the 
journals designated for official notices. 

15. Two of the members of the Board of Directors chosen 
from the commercial or industrial classes shall, in alternate 
weeks, manage the business of the Loan Bureaus and see 
that the provisions of this Act are observed. 

16. The Imperial representative must keep informed of the 
whole business of the Bureau and has a right of veto upon 
all applications for loans. The determination of the reduction 
to be made from the current or market price of the securities 
pledged, within the limits set by the regulations of the busi- 
ness, rests with the imperial representatives after receiving the 
advice of the Board of Directors. 

17. The profits of the Loan Bureaus, after deducting the 
expenses of administration, shall be applied to covering any 
possible losses and to the future redemption of the notes of 
the Bureaus. Any possible surplus goes to the Imperial 
Treasury. 

18. The notes of the Loan Bureaus shall be issued in 
denominations of 5, 10, 20, and 50 marks. The issue of larger 
denominations of the notes, and the proportions in which 
the various denominations are to be used, will be determined 
by the regulations of the Imperial Chancellor. [Under this 
provision, and by Act of August 31^ 1914, denominations of 
1 and 2 marks were issued.] 

435 



WAR COSTS AND THEIR FINANCING 

The notes of the Loan Bureaus shall be issued by the 
Administration of the Imperial Debt {Reichsschuldenver- 
tcaltung), within the maximum limits (paragraph 2, part 3), 
according to the orders of the Imperial Chancellor given to 
the Administration-in- Chief of the Loan Bureaus, which 
assumes the responsibility for the issue. 

The control over the preparation and issue of the notes of 
the Loan Bureaus is exercised by the Commission on the 
Imperial Debt. 

The Imperial Chancellor is to make public monthly the 
amount of the notes of the Loan Bureaus outstanding. 

19. As soon as the need for a Loan Bureau no longer 
exists, the Imj)erial Chancellor is to close it up and make 
l^ublic the fact. 

On the return of peace, the notes of the Loan Bureaus, 
issued by virtue of this Act, shall be withdrawn according to 
the detailed instructions of the Federal Council. 

20. [Paragraphs 146-149, 151, 152 and 360, Numbers 4-6, 
of the criminal law apply to these notes.] 

21. The advances on securities (Lombards) granted by the 
Reichsbank, in the period from August 3, 1914, to the estab- 
lishment of the Loan Bureaus, on other securities than those 
mentioned in paragraph 13, No. 3, of the Bank Act (March 
14, 1875), are hereby ratified. 

22. This law goes into effect on the day of its promulgation. 



APPENDIX ly 

liberty bond acts 

First Liberty Bond Act 

An Act To authorize an issue of bonds to meet expenditures for 
the national security and defense, and, for the purpose of 
assisting in the prosecution of the war, to extend credit to 
foreign governments, and for other purposes. 

Be it enacted hy the Senate and House of Representatives 
of the United States of America in Congress assembled, That 
the Secretary of the Treasury, ^vith the approval of the 
President, is hereby authorized to borrow, from time to time, 
on the credit of the United States for the purposes of this 
Act, and to meet expenditures authorized for the national 
security and defense and other public purposes authorized 
by law not exceeding in the aggregate $5,000,000,000, exclusive 
of the sums authorized by section four of this Act, and to 
issue therefor bonds of the United States. 

The bonds herein authorized shall be in such form and sub- 
ject to such terms and conditions of issue, conversion, redemp- 
tion, maturities, payment, and rate and time of payment of 
interest, not exceeding three and one-half per centum per 
annum, as the Secretary of the Treasury may prescribe. The 
principal and interest thereof shall be payable in United 
States gold coin of the present standard of value and shall 
be exempt, both as to principal and interest, from all taxation, 
except estate or inheritance taxes, imposed by authority of 
the United States, or its possessions, or by any State or 
local taxing authority; but such bonds shall not bear the 
circulation privilege. 

The bonds herein authorized shall first be offered at not less 
than par as a popular loan, under such regulations prescribed 
by the Secretary of the Treasury as will give all citizens of 
the United States an equal opportunity to participate therein ; 
and any portion of the bonds so offered and not subscribed 

437 



WAR COSTS AND THEIR FINANCING 

i'or may be otherwise disposed of at not less than par by 
the Secretary of the Treasury; but no commissions shall be 
allowed or paid on any bonds issued under authority of this 
Act. 

Sec. 2, That for the purpose of more effectually providing 
foe the national security and defense and prosecuting the 
war by establishing credits in the United States for foreign 
governments, the Secretary of the Treasury, with the approval 
of the President, is hereby authorized, on behalf of the United 
States, to purchase, at par, from such foreign governments 
then engaged in Avar with the enemies of the United States, 
their obligations hereafter issued, bearing the same rate of 
interest and containing in their essentials the same terms 
and conditions as those of the United States issued under 
authority of this Act; to enter into such arrangements as 
may be necessary or desirable for establishing such credits 
and for purchasing such obligations of foreign governments 
and for the subsequent paj^ment thereof before maturity, but 
such arrangements shall provide that if any of the bonds 
of the United States issued and used for the purchase of such 
foreign obligations shall thereafter be converted into other 
bonds of the United States bearing a higher rate of interest 
than three and one-half per centum per annum under the 
provisions of section five of this Act, then and in that event 
the obligations of such foreign governments held by the 
United States shall be, by such foreign governments, converted 
in like manner and extent into obligations bearing the same 
rate of interest as the bonds of the United States issued 
under the provisions of section five of this Act. For the 
purposes of this section there is appropriated, out of any 
money in the Treasury not otheinvise appropriated, the sum 
of $3,000,000,000, or so much thereof as may be necessary: 
Provided, That the authority granted by this section to the 
Secretary of the Treasury to purchase bonds from foreign 
governments, as aforesaid, shall cease upon the termination 
of the war between the United States and the Imperial German 
Government. 

Sec. 3. That the Secretary of the Treasury, under such 
terms and conditions as he may prescribe, is hereby authorized 
to receive on or before maturity payment for any obligations 
of such foreign governments purchased on behalf of the 

438 



LIBERTY BOND ACTS 

United States, and to sell at not less than tlie purchase price 
any of such obligations and to apply the proceeds thereof, 
and any payments made by foreign governments on account 
of their said obligations to the redemption or purchase at not 
more than par and accrued interest of any bonds of the United 
States issued under authority of this Act; and if such bonds 
are not available for this purpose the Secretary of the Treas- 
ury shall redeem or purchase any other outstanding interest- 
bearing obligations of the United States which may at such 
time be subject to call or which may be purchased at not 
more than par and accrued interest. 

Sec. 4. That the Secretaiy of the Treasury, in his dis- 
cretion, is hereby authorized to issue the bonds not already 
issued heretofore authorized by section thirty-nine of the 
Act approved August fifth, nineteen hundred and nine, 
entitled ^' An Act to provide revenue, equalize duties, and 
encourage the industries of the United States, and for other 
purposes " ; section one hundred and twenty-four of the A.ct 
approved June third, nineteen hundred and sixteen, entitled 
" An Act for making further and more effectual provision 
for the national defense, and for other purposes " ; section 
thirteen of the Act of September seventh, nineteen hundred 
and sixteen, entitled " An Act to establish a United States 
shipping board for the purpose of encouraging, developing, 
and creating a naval auxiliary and a naval reserve and a 
merchant marine to meet the requirements of the commerce 
of the United States with its Territories and possessions and 
with foreign countries, to regulate carriers by water engaged 
in the foreign and interstate commerce of the United States, 
and for other purposes " ; section four hundred of the Act 
approved March third, nineteen hundred and seventeen, 
entitled " An Act to provide increased revenue to defray the 
expenses of the increased appropriations for the Army and 
Navy and the extensions of fortifications, and for other pur- 
poses " ; and the public resolution approved March fourth, 
nineteen hundred and seventeen, entitled " Joint resolution 
to expedite the delivery of materials, equipttient, and munitions 
and secure more expeditious construction of ships," in the 
manner and under the terms and conditions prescribed in 
section one of this Act. 

That the Secretary of the Treasury is hereby authorized to 

439 



WAR COSTS AND THEIR FINANCING 

borrow on the credit of the United States from time to time, 
in addition to the sum authorized in section one of this Act, 
such additional amount, not exceeding $63,945,460 as may be 
r.eeefcsary to redeem the three per cent, loan of nineteen 
hundred and eight to nineteen hundred and eighteen, maturing 
August first, nineteen hundred and eighteen, and to issue 
therefor bonds of the United States in the manner and under 
the terms and conditions prescribed in section one of this Act. 

Sec. 5. That any series of bonds issued under authority 
of sections one and four of this Act may, under such terms 
and conditions as the Secretary of the Treasury may prescribe, 
be convertible into bonds bearing a higher rate of interest 
than the rate at which the same were issued if any subsequent 
series of bonds shall be issued at a higher rate of interest 
before the termination of the war between the United States 
and the Imperial German Government, the date of such ter- 
mination to be fixed by a proclamation of the President of 
the United States. 

Sec. 6. That in addition to the bonds authorized by sec- 
tions one and four of this Act, the Secretary of the Treasury 
is authorized to borrow from time to time, on the credit of 
the United States, for the purposes of this Act and to meet 
public expenditures authorized by law, such sum or sums as, 
in his judgment, may be necessary, and to issue therefor 
certificates of indebtedness at not less than par in such form 
and subject to such terms and conditions and at such rate 
of interest, not exceeding three and one-half per centum per 
annum, as he may prescribe; and each certificate so issued 
shall be paj^able, with the interest accrued thereon, at such 
time, not exceeding one year from the date of its issue, as 
the Secretary of the Treasury may prescribe. Certificates of 
indebtedness herein authorized shall not bear the circulation 
privilege, and the sum of such certificates outstanding shall 
at no time exceed in the aggregate $2,000,000,000, and such 
certificates shall be exempt, both as to principal and interest, 
from all taxation, except estate or inheritance taxes, imposed 
by authority of the United States, or its possessions, or by 
any State or local taxing authorit3\ 

Sec. 7. That the Secretary of the Treasury, in his discre- 
tion, is hereby authorized to deposit in such banks and trust 
companies as he may designate the proceeds, or anv part 

440 



LIBERTY BOND ACTS 

thereof, arising from the sale of the bonds and certificates of 
indebtedness authorized by this Act, or the bonds previously 
authorized as described in section four of this Act, and such 
deposits may bear such rate of interest and be subject to 
such terms and conditions as the Secretary of the Treasury 
may prescribe: Provided, That the amount so deposited shall 
not in any case exceed the amount withdrawn from any such 
bank or trust company and invested in such bonds or certifi- 
cates of indebtedness plus the amount so invested by such 
bank or trust company, and such deposits shall be secured in 
the manner required for other deposits by section fifty-one hun- 
dred and fifty-three. Revised Statutes, and amendments thereto : 
Provided further, That the provisions of section fifty-one 
hundred and ninety-one of the Revised Statutes, as amended 
by the Federal Reserve Act and the amendments thereof, with 
reference to the reserves required to be kept by national 
banking associations and other member banks of the Federal 
Reserve System, shall not apply to deposits of public moneys 
by the United States in designated depositaries. 

Sec. 8. That in order to pay all necessary expenses, includ- 
ing rent, connected with any operations under this Act, a sum 
not exceeding one-tenth of one per centum of the amount of 
bonds and one-tenth of one per centum of the amount of 
certificates of indebtedness herein authorized is hereby appro- 
priated, or as much thereof, as may be necessary, out of any 
monc}' in the Treasury not othermse appropriated, to be 
expended as the Secretary of the Treasury may direct: Pro- 
vided, That, in addition to the reports noAV required by law, 
the Secretary of the Treasury shall, on the first Monday in 
December, nineteen hundred and seventeen, and annually 
thereafter, transmit to the Congress a detailed statement of 
all expenditures under this Act. 

Approved, April 24, 1917. 



WAR COSTS AND THEIR FINANCING 

Secoxd Liberty Bond Act 

An Act To authorize an additional issue of bonds to meet 
expenditures for the national security and defense, and, for 
the purpose of assisting in the prosecution of the war, 
to extend additional credit to foreign Governments, and 
for other purposes. 

Be it enacted by the Senate and House of Representatives 
of the United States of America in Congress assembled, That 
the Secretary of the Treasurj^, with the approval of the 
President, is hereby authorized to borrow, from time to time, 
on the credit of the United States for the purposes of this 
Act, and to meet expenditures authorized for the national 
security and defense and other public purposes authorized 
by law, not exceeding in the aggregate $7,538,945,460, and 
to issue therefor bonds of the United States, in addition to 
the $2,000,000,000 bonds already issued or offered for sub- 
scription under authority of the Act approved April twenty- 
fourth, nineteen hundred and seventeen, entitled " An Act to 
authorize an issue of bonds to meet expenditures for the 
national security and defense, and, for the purpose of assist- 
ing in the prosecution of the war, to extend credit to foreign 
governments, and for other purposes " ; Provided, That of 
this sum $3,063,945,460 shall be in lieu of that amount of the 
unissued bonds authorized by sections one and four of the 
Act approved Ajoril twentj^-fourtli, nineteen hundred and 
seventeen, $225,000,000 shall be in lieu of that amount of the 
unissued bonds authorized by section thirtj^-nine of the Act 
approved August fifth, nineteen hundred and nine, $150,000,- 
000 shall be in lieu of the unissued bonds authorized by the 
joint resolution approved March fourth, nineteen hundred 
and seventeen, and $100,000,000 shall be in lieu of the unissued 
bonds authorized by section four hundred of the Act approved 
March third, nineteen hundred and seventeen. 

The bonds herein authorized shall be in such form or forms 
and denomination or denominations and subject to such teinns 
and conditions of issue, conversion, redemption, maturities, 
payment, and rate or rates of interest, not exceeding four 
per centum per annum, and time or times of payment of 
interest, as the Secretary of the Treasury from time to time 
at or before the issue thereof may prescribe. The principal 

442 



LIBERTY BOND ACTS 

and interest thereof shall be i:)ayable in United States gold 
coin of the present standard of value. 

The bonds herein authorized shall from time to time first 
be offered at not less than par as a pojDular loan, under such 
regulations, prescribed by the Secretary of the Treasury from 
time to time, as will in his opinion give the people of the 
United States as nearly as may be an equal opportunity to 
participate therein, but he may make allotment in full upon 
applications for smaller amounts of bonds in advance of any 
date which he may set for the closing of subscriptions and 
may reject or reduce allotments upon later applications and 
applications for larger amounts, and may reject or reduce 
allotments upon applications from incorporated banks and 
trust companies for their own account and make allotment in 
full or larger allotments to others, and may establish a gradu- 
ated scale of allotments, and may from time to time adopt any 
or all of said methods, should any such action be deemed by 
him to be in the public interest : Provided, That such reduction 
or increase of allotments of such bonds shall be made under 
general rules to be prescribed by said Secretary and shall 
apply to all subscribers similarly situated. And any portion 
of the bonds so offered and not taken may be otherwise dis- 
posed of by the Secretary of the Treasury in such manner 
and at such price or prices, not less than par, as he may 
determine. 

Sec. 2. That for the purpose of more effectually providing 
for the national security and defense and prosecuting the 
war, the Secretary of the Treasury, with the approval of the 
President, is hereby authorized, on behalf of the United States, 
to establish credits with the United States for any foreign 
governments then engaged in war with the enemies of the 
United States and, to the extent of the credits so established 
from time to time, the Secretary of the Treasury is hereby 
authorized to purchase, at par, from such foreign governments 
respectively their several obligations hereafter issued, bearing 
such rate or rates of interest, maturing at such date or dates, 
not later than the bonds of the United States then last issued 
under the authority of this Act, or of such Act approved 
April twenty-fourth, nineteen hundred and seventeen, and con- 
taining such terms and conditions as the Secretary of the 
Treasury may from time to time determine, or to make 

443 



WAR COSTS AND THEIR FINANCING 

advances to or for the account of any such foreign govern- 
ments and to receive such obligations at par for the amount 
of an}^ such advances; but the rate or rates of interest borne 
by any such obligations shall not be less than the highest 
rate borne by any bonds of the United States which, at the 
time of the acquisiti^xi thereof, shall have been issued under 
authority of said Act approved April twenty-fourth, nineteen 
hundred and seventeen, or of this Act, and any such obliga- 
tions shall contain such provisions as the Secretary of the 
Treasury may from time to time determine for the conversion 
of a proportionate part of such obligations into obligations 
bearing a higher rate of interest if bonds of the United States 
issued under authority of this Act shall be converted into 
other bonds of the United States bearing a higher rate of 
interest, but the rate of interest in such foreign obligations 
issued upon such conversion shall not be less than the highest 
rate of interest borne by such bonds of the United States ; and 
the Secretary of the Treasury with the approval of the Presi- 
dent, is hereby authorized to enter into such arrangements 
from time to time with any such foreign Governments as may 
be necessary or desirable for establishing such credits and for 
the payment of such obligations of foreign Governments be- 
fore maturity. For the purposes of this section there is 
appropriated, out of any money in the Treasury not other- 
wise appropriated, the sum of $4,000,000,000, and in addition 
thereto the unexpended balance of the appropriations made 
by section two of said Act approved April twentj-fourth, 
nineteen hundred and seventeen, or so much thereof as may 
be necessary: Provided, That the authority granted by this 
section to the Secretary of the Treasury to establish credits 
for foreign Governments, as aforesaid, shall cease upon the 
termination of the war between the United States and the 
Imperial German Government. 

Sec. 3. That the Secretary of the Treasury is hereby 
authorized, from time to time, to exercise in respect to any 
obligations of foreign governments acquired under authority 
of this Act or of said Act approved April twenty-fourth, 
nineteen hundred and seventeen, any privilege of conversion 
into obligations bearing interest at a higher rate provided for 
in or pursuant to this Act or said Act approved April twenty- 
fourth, nineteen hundred and seventeen, and to convert any 

444 



LIBERTY BOND ACTS 

short time obligations of foreign governments which may have 
been purchased under the authority of this Act or of said Act 
approved April twenty-fourth, nineteen hundred and seven- 
teen, into long time obligations of such foreign governments, 
respectively, maturing not later than the bonds of the United 
States then last issued under the authority of this Act or of 
said Act approved April twenty-fourth, nineteen hundred and 
seventeen, as the case may be, and in such form and terms as 
the Secretary of the Treasury may prescribe; but the rate or 
rates of interest borne by any such long-time obligations at 
the time of their acquisition shall not be less than the rate 
borne by the short time obligations so converted into such 
long time obligations; and, under such terms and conditions 
as he may from time to time prescribe, to receive payment, on 
or before maturity, of any obligations of such foreign 
governments acquired on behalf of the United States under 
authority of this Act or of said Act approved April twenty- 
fourih, nineteen hundred and seventeen, and, with the approval 
of the President, to sell any of such obligations (but not at 
less than the purchase price with accrued interest unless other- 
wise hereafter provided by law), and to apply the proceeds 
thereof, and any payments so received from foreign govern- 
ments on account of the principal of their said obligations, to 
the redemption or purchase, at not more than par and accrued 
interest, of any bonds of the United States issued under 
authority of this Act or of said Act approved April twenty- 
fourth, nineteen hundred and seventeen, and if such bonds 
cannot be so redeemed or purchased the Secretary of the 
Treasury shall redeem or purchase any other outstanding 
interest-bearing obligations of the United States which may at 
such time be subject to redemption or which can be purchased 
at not more than par and accrued interest. 

Sec. 4. That in connection with the issue of any series 
of bonds under the authority of section one of this Act the 
Secretary of the Treasury may determine that the bonds of 
such series shall be convertible as provided in or pursuant to 
this section, and, in any such case, he may make appropriate 
provision to that end in offering for subscription the bonds 
of such series (hereinafter called convertible bonds). In any 
case of the issue of a series of convertible bonds, if a subse- 
quent series of bonds (not including United States certificates 

445 



WAR COSTS AND THEIR FINANCING 

of indebtedness, Avar savings certificates, and other obligations 
maturing not more than five years from the issue of such 
obligations, respectively) bearing interest at a higher rate 
shall, under the authority of this or any other Act, be issued 
by the United States before the termination of the war between 
the United States and the Imperial German Government, then 
the holders of such convertible bonds shall have the privilege, 
at the ojDtion of the several holders, at any time within such 
period, after the public offering of bonds of such subsequent 
series, and under such rules and regulations as the Secretary 
of the Treasury shall have jDrescribed, of converting their 
bonds, at par, into bonds bearing such higher rate of interest 
at such price not less than par as the Secretary of the Treas- 
ury shall have prescribed. The bonds to be issued upon such 
conversion under this Act shall be substantially the same 
in form and terms as shall be prescribed by or pursuant to 
law with respect to the bonds of such subsequent series, not 
only as to interest rate but also as to convertibilitj" (if future 
bonds be issued at a still higher rate of interest) or noncon- 
vertibility, and as to exemption from taxation, if Siny, and in 
all other respects, except that the bonds issued upon such 
conversion shall have the same dates of maturity, of principal, 
and of interest, and be subject to the same terms of redemp- 
tion before maturity, as the bonds converted; and such bonds 
shall be issued from time to time if and when to the extent 
that the privilege of conversion so conferred shall arise and 
shall be exercised. If the privilege of conversion so conferred 
under this Act shall once arise, and shall not be exercised with 
respect to any convertible bonds within the period so pre- 
scribed by the Secretary of the Treasury, then such privilege 
shall terminate as to such bonds and shall not arise again 
though again thereafter bonds be issued bearing interest at a 
higher rate or rates. 

Sec. 5. That in addition io the bonds authorized by section 
one of this Act the Secretary of the Treasury is authorized 
to borrow from time to time, on the credit of the United 
States, for the purpose of this Act and to meet public ex- 
penditures authorized bj^ law, such sum or sums as in his 
judgment may be necessary, and to issue therefor certificates 
of indebtedness of the United States at not less than par in 
such form or forms and subject to such terms and conditions 

446 



LIBERTY BOND ACTS 

and at such rate or rates of interest as he may prescribe ; and 
each certificate so issued shall be payable at such time not 
exceeding one j-ear from the date of its issue, and may be 
redeemable before maturity upon such terms and conditions, 
and the interest accruing thereon shall be payable at such 
time or times as the Secretary of the Treasury may prescribe. 
The sum of such certificates outstanding hereunder and under 
section six of said Act approved April tAventy-f ourth, nineteen 
hundred and seventeen, shall not at any one time exceed in 
the aggregate $4,000,000,000. 

Sec. 6. That in addition to the bonds authorized by section 
one of this Act and the certificates of indebtedness authorized 
by section five of this Act, the Secretary of the Treasury is 
authorized to borrow from time to time, on the credit of the 
United States, for the purposes of this Act and to meet 
public expenditures authorized by law, such sum or sums as 
in his judgment may be necessary, and to issue therefor, at 
such price or prices and upon such terms and conditions as 
he may determine, war-savings certificates of the United States 
on which interest to maturity may be discounted in advance at 
such rate or rates and computed in such manner as he may 
prescribe. Such war-savings certificates shall be in such form 
or forms and subject to such terms and conditions, and may 
have such provisions for payment thereof before maturity, as 
the Secretary of the Treasury may prescribe. Each war- 
saving certificate so issued shall be payable at such time, not 
exceeding five years from the date of its issue, and may be 
redeemable before maturity, upon such terms and conditions 
as the Secretary of the Treasury may prescribe. The sum 
of such war-savings certificates outstanding shall not at any 
one time exceed in the aggregate $2,000,000,000. The amount 
of war-savings certificates sold to any one person at any 
one time shall not exceed $100, and it shall not be lawful 
for any one person at any one time to hold war-savings 
certificates to an aggregate amount exceeding $1,000. The 
Secretary of the Treasury may, under such regulations and 
upon such terms and conditions as he may prescribe, issue, 
or cause to be issued, stamps to evidence payments for or on 
account of such certificates. 

Sec. 7. That none of the bonds authorized by section one, 
nor of the certificates authorized by section five, or by section 

447 



WAR COSTS AND THEIR FINANCING 

six, of tliis Act, shall bear the circulation privilege. All such 
bonds and certificates shall be exempt, both as to principal 
and interest from all taxation now or hereafter imposed by 
the United States, any State, or any of the possessions of the 
United States, or by any local taxing authority, except (a) 
estate or inheritance taxes, and (b) graduated additional 
income taxes, commonly known as surtaxes, and excess profits 
and war-profits taxes, now or hereafter imposed by the United 
States, upon the income or profits of individuals, partner- 
ships, associations, or corporations. The interest on an 
amount of such bonds and certificates the principal of which 
does not exceed in the aggregate $5,000, owned by any indi- 
vidual, partnership, association, or corporation, shall be 
exempt from the taxes provided for in subdivision (b) of this 
section. 

Sec. 8. That the Secretary of the Treasury, in his dis- 
cretion is hereby authorized to deposit, in such incorporated 
banks and trust companies as he may designate, the proceeds, 
or any part thereof, arising from the sale of the bonds and 
certificates of indebtedness and Avar-savings certificates author- 
ized by this Act, and such deposits shall bear such rate or 
rates of interest, and shall be secured in such manner, and 
shall be made upon and subject to such terms and conditions, 
as the Secretary of the Treasury may from time to time 
prescribe: Provided^ That the |3rovisions of section fifty-one 
hundred and ninety-one of the Revised Statutes, as amended 
hj the Federal Reserve Act, and the amendments thereof, 
with reference to the reserves required to be kept by national 
banking associations and other member banks of the Federal 
Reserve Sj^stem, shall not apply to deposits of public moneys 
by the United States in designated depositaries. The Secre- 
tary of the Treasurj^ is hereby authorized to designate de- 
positaries in foreign countries, with which shall be deposited 
all public money which it may be necessary or desirable to 
have on deposit in such countries to provide for current 
disbursements to the militar}^ and naval forces of the United 
States and to the diplomatic and consular and other repre- 
sentatives of the United States in and about such countries 
until six months after the termination of the war between 
the United States and the Imperial German Government, and 
to prescribe the terms and conditions of such deposits. 

448 



LIBERTY BOND ACTS 

Sec. 9. That in connection with the operations of advertis- 
ing, selling, and delivering any bonds, certificates of indebted- 
ness, or war-savings certificates of the United States provided 
for in this Act, the Postmaster General, under such regula- 
tions as he may prescribe, shall require, at the request of the 
Secretary of the Treasury, the employees of the Post Office 
Department and of the Postal Service to perform such services 
as may be necessary, desirable, or practicable, without extra 
compensation. 

Sec. 10. That in order to pay all necessary expenses, 
including rent, connected with any operations under this Act, 
except section twelve, a sum not exceeding one-fifth of one 
per centum of the amount of bonds and war-savings certificates 
and one-tenth of one per centum of the amount of certificates 
of indebtedness herein authorized is hereby appropriated, or 
as much thereof as may be necessary, out of any money in the 
Treasury not otherwise appropriated, to be expended as the Sec- 
retary of the Treasury may direct : Provided, That in addition 
to the reports now required by law, the Secretary of the Treas- 
ury shall, on the first Monday in December, nineteen hundred 
and eighteen, and annually thereafter, transmit to the Congress 
r 'letpjled statement of all expenditures under this Act. 
" ' -,' "^^"11. That bonds shall not be issued under authority 
n ns one and four of said Act approved April twenty- 
• . . , _x ^aineteen hundred and seventeen, in addition to the 
{pL,. ,.J0,000 thereof heretofore issued or offered for sub- 
scription, but bonds shall be issued from time to time upon 
the interchange of such bonds of different denominations and 
of coupon and registered bonds and upon the transfer of 
registered bonds, under such rules and regulations as the 
Secretary of the Treasury shall prescribe, and, if to the 
extent that the privilege of conversion provided for in such 
bonds shall arise and shall be exercised, in accordance with 
such provision for such conversion. No bonds shall be issued 
under authority of the several sections of Acts and of the 
resolution mentioned in said section four of the Act approved 
April twenty-fourth, nineteen hundred and seventeen; but the 
proceeds of the bonds herein authorized may be used for 
purposes mentioned in said section four of the Act of April 
twentj^-fourth, nineteen hundred and seventeen, and as set 
forth in the Acts therein enumerated. 

449 



WAR COSTS AND THEIR FINANCING 

That section two of an Act of Congress approved February 
fourth, nineteen hundred and ten, entitled " An Act prescrib- 
ing certain provisions and conditions under which bonds and 
certificates of indebtedness of the United States may be issued, 
and for other purposes," is hereby amended to read as follows : 

" Sec. 2. That any certificates of indebtedness hereafter 
issued shall be exempt from all taxes cr duties of the United 
States (but, in the case of certificates issued after September 
first, nineteen hundred and seventeen, only if and to the 
extent provided in connection Avith the issue thereof), as well 
as from taxation in any form by or under State, municipal, 
or local authority and that a sum not exceeding one-tenth of 
one per centum of the amount of any certificates of indebted- 
ness issued is hereby appropriated, out of any money in the 
Treasury not otherwise appropriated, to pay the expenses of 
preparing, advertising, and issuing the same." 

Sec. 12. That the Secretary of the Treasury is authorized 
during the war, whenever it shall apjpear that the public 
irterests require that any of the accounts of the Military 
Establishment be audited at any place other than the seat 
of Government, to direct the Comptroller of the Treasury and 
the Auditor for the War Department to exercise, either in 
person or through assistants, the powers and perj^o time' 
duties of their offices at any place or places away ifty-one 
seat of Government in the manner that is or may beinpTjrlori^ 
by law at the seat of Government and in accordance with the 
provisions of this section. 

(a) That when the Secretary of the Treasury shall exercise 
the authority herein referred to, the powers and duties of the 
said comptroller and auditor, under and jDursuant to the pro- 
visions of the Act of July thirty-first, eighteen hundred and 
ninety-four, and all other laws conferring jurisdiction upon 
those officers, shall be exercised and performed in the same 
manner as nearly as jDracticable and Avith the same effect 
away from the seat of Government as they are now exercised 
and performed and have effect at the seat of Government, and 
decisions authorized by law to be rendered by the comptroller 
at the request of disbursing officers may be rendered with the 
same effect by such assistants as may be authorized b}^ him 
to perform that duty. 

(b) That when pursuant to this section the said comptroller 

450 



LIBERTY BOND ACTS 

and auditor shall perform their duties at a place in a foreign 
country, the balances arising upon the settlement of accounts 
and claims of the Military Establishment shall be certified by 
the auditor to the Division of Bookkeeping and Warrants of 
the Treasury Department as now provided for the certification 
of balances by said auditor in Washington, and the balances 
so found due shall be final and conclusive upon all branches 
of the Government, except that any person whose account 
has been settled or the commanding officer of the Army 
abroad, or the comptroller may obtain a revision of such 
settlement by the comptroller upon application therefor within 
three months, the decision to be likewise final and conclusive 
and the differences arising upon such revision to be certified to 
and stated by the auditor as now provided by law : Provided, 
That certificates of balances due may be transmitted to and 
paid by the proper disbursing officer abroad instead of by 
warrant: Provided further, That any person whose account 
has been settled, or the Secretary of War, may obtain a 
reopening and review of any settlement made pursuant to 
this section upon application to the Comptroller of the Treas- 
ury in Washington within one year after the close of the 
war, and the action of the comptroller thereon shall be final 
and conclusive in the same manner as herein provided in the 
case of a balance found due by the auditor. 

(c) That the comptroller and auditor shall preserve the 
accounts, and the vouchers and papers connected therewith, 
and the files of their offices in the foreign country and trans- 
mit them to Washington within six months after the close of 
the war and at such earlier time as may be directed bj^ the 
Secretary of the Treasury as to any or all accounts, vouchers, 
papers, and files. 

(d) That the Secretary of the Treasury is authorized to 
appoint an assistant comptroller and an assistant auditor and 
to fix their compensation, and to designate from among the 
persons to be employed hereunder one or more to act in the 
absence or disability of such assistant comptroller and assist- 
ant auditor. He shall also prescribe the number and maximum 
compensation to be paid to agents, accountants, clerks, trans- 
lators, interpreters, and other persons who may be employed 
in the work under this section by the comptroller and auditor. 
The assistant comptroller and assistant auditor shall have full 

451 



WAR COSTS AND THEIR FINANCING 

power to perform in a foreign country all the duties with 
reference to the settlement there of the accounts of the 
Militaiy Establishment that the comptroller and auditor now 
have at the seat of Government and in foreign countries under 
the provisions of this section, and shall perform such duties 
in accordance with the instructions received from and rules 
and regulations made by the comptroller and auditor. Such 
persons as are residing in a foreign country when first em- 
ploj'ed hereunder shall not be required to take an oath of 
office or be required to be employed pursuant to the laws, 
rules, and regulations relating to the classified civil service, 
nor shall they be reimbursed for subsistence expenses at their 
post of duty or for expenses in traveling to or from the 
United States. 

(e) That it shall be the duty of all contracting, purchasing, 
and disbursing officers to allow any representative of the 
comptroller or auditor to examine all books, records, and 
papers in any way connected with the recei^^t, disbursement, 
or disposal of public money, and to render such accounts and 
at such times as may be required by the comptroller. No 
administrative examination by the War Department shall be 
required of accounts rendered and settled abroad, and the 
time within which these accounts shall be rendered by disburs- 
ing ofiicers shall be prescribed hj the comptroller, who shall 
have power to waive any delinquency as to time or form 
in the rendition of these accounts. All contracts connected 
with accounts to be settled by the auditor abroad shall be filed 
in his office there. 

(f) That am^ person appointed or employed under the 
provisions of this section who at the time is in the service of 
the United States shall, upon termination of his services here- 
under, be restored to the position held by him at the time of 
such employment. No provision of existing law shall be 
construed to prevent the pajTnent of money appropriated for 
the salary of any Government officer or employee at the seat 
of Government who may de detailed to perform duty under 
this section outside the District of Columbia, and such details 
are hereby authorized. 

(g) That for the payment of the expenses in carrying into 
effect this section, including traveling expenses, per diein of 
$4 m lieu of subsistence for officers and employees absent 

452 



LIBERTY BOND ACTS 

from Washington, rent, cablegrams and telegrams, printing, 
law books, books of reference, periodicals, stationery, office 
equipment and exchange thereof, supplies, and all other 
necessary expenses, there is hereby appropriated, out of any 
money in the Treasury not otherwise appropriated, for the 
fiscal year ending June thirtieth, nineteen hundred and 
eighteen, the sum of $300,000, of which not exceeding $25,000 
may be expended at Washington for the purposes of 
this section, but no officer or employee shall receive for 
duty in Washington any compensation other than his regular 
salary. 

(h) That the Secretary of the Treasury may designate not 
more than two persons employed hereunder to act as special 
disbursing agents of the appropriation herein, to serve under 
the direction of the comptroller, and their accounts shall be 
rendered to and settled by the accounting officers of the 
Treasury in Washington. All persons employed under this 
section shall perform such additional duties as the Secretary 
of the Treasury may direct. 

(i) That the comptroller and the auditor, and such persons 
as may be authorized in writing by either of them, may 
administer oaths to American citizens in respect to any matter 
within the jurisdiction of either of said officers and certify 
the official character, when known, of any foreign officer 
whose jurat or certificate may be necessary on any paper to 
be filed with them. 

(j) That persons engaged in work abroad under the pro- 
visions of this section may purchase from Army stores for 
cash and at cost price for their own use such articles or 
stores as may be sold to officers and enlisted men. 

(k) That the authority granted under this section shall 
terminate six months after the close of the war or at such 
earlier date as the Secretary of the Treasury may direct, and 
it shall be the duty of the comptroller and auditor to make 
such reports as the Secretary of the Treasury may require of 
the expenditures made and work done pursuant to this section, 
and such reports shall be transmitted to the Congi'ess at such 
time as he may decide to be compatible with the public 
interest. 

(1) No officers, employees, or agents appointed or employed 
under this section shall receive more salary or compensation 

453 



WAR COSTS AND THEIR FINANCING 

than like officers, employees, or agents of the Government now 
receive. 

Sec. 13. That for the purposes of this Act the date of the 
termination of the war between the United States and the 
Imperial German Government shall be fixed by proclamation 
of the President of the United States. 

Approved, September 24, 1917. 

Supplement to Second Liberty Bond Act 

An Act To supplement the Second Liberty Bond Act, as amended, 
and for other purposes. 

Be it enacted hy the Senate and House of Representatives 
of the United States of America in Congress assembled, That 
until the expiration of two years after the date of the ter- 
mination of the war between the United States and the 
Imperial German Government, as fixed by proclamation of the 
President — 

(1) The interest on an amount of bonds of the Fourth 
Liberty Loan the principal of which does not exceed $30,000, 
owned by any individual, partnership, association, or corpora- 
tion, shall be exempt from graduated additional income taxes, 
commonly known as surtaxes, and excess profits and war- 
profits taxes, now or hereafter imposed by the United States, 
upon the income or profits of individuals, . partnerships, 
associations, or corporations; 

(2) The interest received after January 1, 1918, on an 
amount of bonds of the First Liberty Loan Converted, dated 
either November 15, 1917, or May 9, 1918, the Second Liberty 
Loan, converted and unconverted, and the Third Liberty Loan, 
the principal of which does not exceed $45,000 in the aggre- 
gate, 0"\vned by any individual, partnership, association, or 
corporation, shall be exempt from such taxes : Provided, how- 
ever, That no owner of such bonds shall be entitled to such 
exemption in respect to the interest on an aggregate principal 
amount of such bonds exceeding one and one-half times the 
principal amount of bonds of the Fourth Liberty Loan origi- 
nally subscribed for by such owner and still o-svned by him at 
the date of his tax return; and 

(3) The interest on amount of bonds, the principal of 
which does not exceed $30,000, o^\Tied by any individual, 

454 



LIBERTY BOND ACTS 

partnership, association, or corporation, issued upon conver- 
sion of 3^2 per centum bonds of the First Liberty Loan in 
the exercise of any privilege arising as a consequence of the 
issue of bonds of the Fourth Liberty Loan, shall be exempt 
from such taxes. 

The exemptions provided in this section shall be in addition 
to the exemption provided in section 7 of the Second Liberty 
Bond Act in respect to the interest on an amount of bonds 
and certificates, authorized by such Act and amendments 
thereto, the principal of which does not exceed in the aggre- 
gate $5,000, and in addition to all other exemptions provided 
in the Second Liberty Bond Act. 

Sec. 2. That section 6 of the Second Liberty Bond Act is 
hereby amended by striking out the figures " $2,000,000,000," 
and inserting in lieu thereof the figures " $4,000,000,000." 
Such section is further amended by striking out the words 
" The amount of war savings certificates sold to any one person 
at any one time shall not exceed $100, and it shall not be 
lawful for any one person at any one time to hold war 
savings certificates to an aggregate amount exceeding $1,000," 
and inserting in lieu thereof the words " It shall not be lawful 
for any one person at any one time to hold war savings 
certificates of any one series to an aggregate amount exceed- 
ing $1,000." 

Sec. 3. That the provisions of section 8 of the Second 
Liberty Bond Act, as amended by the Third Liberty Bond 
Act, shall apply to the proceeds arising from the payment 
of war-profits taxes as well as income and excess profits taxes. 

Sec. 4. That the Secretary of the Treasury may, during 
the war and for two years after its termination, make arrange- 
ments in or with foreign countries to stabilize the foreign 
exchanges and to obtain foreign currencies and credits in such 
currencies, and he may use any such credits and foreign cur- 
rencies for the purpose of stabilizing or rectifying the foreign 
exchanges, and he may designate depositaries in foreign 
countries with which may be deposited as he may determine 
all or any part of the avails of any foreign credits or foreign 
currencies. 

Sec. 5. That subdivision (b) of section 5 of the Trading 
with the Enemy Act be. and hereby is, amended to read as 
follows ; 

455 



WAR COSTS AND THEIR FINANCING 

"(b) That the President may investigate, regulate, or pro- 
hibit, under such rules and regulations as he may prescribe, 
by means of licenses or otherwise, any transactions in foreign 
exchange and the export, hoarding, melting, or earmarkings 
of gold or silver coin or bullion or currency, transfers of credit 
in any form (other than credits relating solely to transactions 
to be executed wholly within the United States), and transfers 
of evidences of indebtedness or of the o^^Tiership of property 
between the United States and any foreign country, whether 
enemj^, ally of enenw, or otherwise, or between residents of 
one or more foreign countries, by any person within the United 
States and, for the purpose of strengthening, sustaining and 
broadening the market for bonds and certificates of indebted- 
ness of the United States, of preventing frauds upon the 
holders thereof, and of protecting such holders, he may in- 
vestigate and regulate, by means of licenses or otherwise 
(until the expiration of two years after the date of the 
termination of the present war with the Imperial German 
Government, as fixed by his proclamation), any transactions 
in such bonds or certificates by or between any person or 
persons : Provided, That nothing contained in this subdivision 
(b) shall be construed to confer any power to prohibit the 
purchase or sale for cash, or for notes eligible for discount 
at any Federal Resei-ve Bank, of bonds or certificates of 
indebtedness of the United States; and he may require any 
person engaged in any transaction referred to in this sub 
division to furnish, under oath, complete information relativd 
thereto, including the production of any books of account, 
contracts, letters or other papers, in connection therewith in 
the custody or control of such person, either before or after 
such transaction is completed." 

Sec. 6. That section 5200 of the Revised Statutes, as 
amended, be, and herebj^ is, amended to read as follows: 

'* Sec. 5200. The total liabilities to any association, of any 
person, or of any company, corporation, or firm for money 
borroAved, including in the liabilities of a company or firm 
the liabilities of the several members thereof, shall at no time 
exceed 10 per centum of the amount of the capital stock of 
such association, actually paid in and unimpaired, and 10 per 
centum of its unimpaired surplus fund: Provided, however, 
That (1) the discount of bills of exchange dra^vn in good faith 

456 



LIBERTY BOND ACTS 

against actually existing values, (2) the discount of com- 
mercial or business paper actually owned by the person, com- 
pany, corporation, or firm, negotiating the same, and (3) the 
purchase or discount of any note or notes secured by not less 
than a like face amount of bonds of the United States issued 
since April 24, 1917, or certificates of indebtedness of the 
United States, shall not be considered as money borrowed 
within the meaning of this section; but the total liabilities to 
any association, of any person or of any company, corpo- 
ration, or firm, upon any note or notes purchased or dis- 
counted by such association and secured by such bonds or 
certificates of indebtedness, shall not exceed (except to the 
extent permitted by rules and regulations prescribed by the 
Comptroller of the Currency, with the approval of the Secre- 
tary of the Treasury) 10 per centum of such capital stock 
and surplus fund of such association.'' 

Sec. 7. That the short title of this Act shall be " Supple- 
ment to Second Liberty Bond Act." 

Approved, September 24, 1918. 

Third Liberty Bond Act 

An Act To amend an Act approved September twenty-fourth, 
nineteen hundred and seventeen, entitled " An Act to author- 
ize an additional issue of bonds to meet expenditures for the 
national security and defense, and, for the purpose of assist- 
ing in the prosecution of the war, to extend additional 
credit to foreign governments, and for other purposes." 

Be it enacted hy the Senate and House of Representatives 
of the United States of America in Congress assembled, That 
the first section of the Act approved September twenty-fourth, 
nineteen hundred and seventeen, entitled " An Act to author- 
ize an additional issue of bonds to meet expenditures for the 
national security and defense, and, for the purpose of assisting 
in the prosecution of the Avar, to extend additional credit to 
foreign governments, and for other purposes," be, and is 
hereby, amended to read as follows: 

" That the Secretary of the Treasury, with the approval of 
the President, is hereby authorized to borrow from time to 
time, on the credit of the United States for the purposes of 
this Act, and to meet expenditures authorized for the national 

457 



WAR COSTS AND THEIR FINANCING 

security and defense and other public purposes authorized by 
law, not exceeding in the aggregate $12,000,000,000, and to 
issue therefor bonds of the United States, in addition to the 
$2,000,000,000 bonds already issued or offered for subscription 
under authority of the Act approved April twenty-fourth, 
nineteen hundred and seventeen, entitled ' An Act to authorize 
an issue of bonds to meet expenditures for the national 
security and defense, and, for the purpose of assisting in the 
prosecution of the war, to extend credit to foreign govern- 
ments, and for other purposes ' : Provided, That of this sum 
$3,063,9-15,460 shall be in lieu of that amount of the unissued 
bonds authorized hj sections one and four of the Act approved 
April twenty-fourth, nineteen hundred and seventeen, $225,- 
000,000 shall be in lieu of that amount of the unissued bonds 
authorized by section thirty-nine of the A.ct approved August 
fifth, nineteen hundred and nine, $150,000,000 shall be in lieu 
of the unissued bonds authorized by the joint resolution 
approved March fourth, nineteen hundred and seventeen, and 
$100,000,000 shall be in lieu of the unissued bonds authorized 
bj^ section four hundred of the Act approved March third, 
nineteen hundred and seventeen. 

'^ The bonds herein authorized shall be in such form or 
forms and denomination or denominations and subject to such 
terms and conditions of issue, conversion, redemption, 
maturities, payment, and rate or rates of interest, not exceed- 
ing four and one-quarter per centum per annum, and time or 
times of payment of interest, as the Secretary of the Treasmy 
from time to time at or before the issue thereof may prescribe. 
The i^rincipal and interest thereof shall be payable in United 
States gold coin of the present standard of value. 

" The bonds herein authorized shall from time to time first 
be offered at not less than par as a popular loan, under such 
regulations, prescribed by the Secretary of the Treasurj^ from 
time to time, as mil in his opinion give the people of the 
United States as nearly as may be an equal opportunity to 
particii^ate therein, but he may make allotment in full upon 
applications for smaller amounts of bonds in advance of 
any date which he may set for the closing of subscriptions and 
may reject or reduce allotments upon later applications and 
applications for larger amounts, and may reject or reduce 
allotments upon applications from incorporated banks and 

458 



LIBERTY BOND ACTS 

trust companies for their own account and make allotment in 
full or larger allotments to others, and may establish a 
graduated scale of allotments, and may from time to time 
adopt any or all of said methods, should any such action be 
deemed by him to be in the public interest: Provided, That 
such reduction or increase of allotments of such bonds shall 
be made under general rules to be prescribed by said Secretary 
and shall apply to all subscribers similarly situated. And 
any portion of the bonds so offered and not taken may be 
otherwise disposed of by the Secretary of the Treasury in 
such manner and at such price or prices, not less than par, 
as he may determine. The Secretary may make special 
arrangements for subscriptions at not less than par from 
persons in the military or naval forces of the United States, 
but any bonds issued to such persons shall be in all respects 
the. same as other bonds of the same issue." 

Sec. 2. That the last sentence of section two of said Act 
approved September twenty-fourth, nineteen hundred and 
seventeen, be, and is hereby, amended to read as follows: 

" For the purposes of this section there is appropriated, 
out of any money in the Treasury not otherwise appropriated, 
the sum of $5,500,000,000, and in addition thereto the unex- 
pended balance of the appropriations made by section two 
of said act approved April twenty-fourth, nineteen hundred 
and seventeen, or so much thereof as may be necessary: 
Provided, That the authority granted by this section to the 
Secretary of the Treasury to establish credits for foreign 
Governments, as aforesaid, shall cease upon the termination 
of the war between the United States and the Imperial 
German Government." 

Sec. 3. That section four of said Act approved September 
twenty-fourth, nineteen hundred and seventeen, is hereby 
amended by adding two new paragraphs, as follows: 

" That holders of bonds bearing interest at a higher rate 
than four per centum per annum, whether issued (a) under 
section one, or (b) upon conversion of four per centum bonds 
issued under section one, or (c) upon conversion of three and 
one-half per centum bonds issued under said Act approved 
April twenty-fourth, nineteen hundred and seventeen, or (d) 
upon conversion of four per centum bonds issued upon con- 
version of such three and one-half per centum bonds, shall 

459 



WAR COSTS AND THEIR FINANCING 

not be entitled to any privilege of conversion under or pursu- 
ant to this section or otherwise. The provisions of section 
seven shall extend to all such bonds. 

^' If bonds bearing interest at a higher rate than four 
per centum per annum shall be issued before July first, 
nineteen hundred and eighteen, then any bonds bearing 
interest at the rate of four per centum per annum which 
shall, after July first, nineteen hundred and eighteen, and 
before the expiration of tfie six months' conversion period 
prescribed by the Secretary of the Treasury, be presented for 
conversion into bonds bearing interest at such higher rate, 
shall, for the purpose of computing the amount of interest 
payable, be deemed to have been converted on the dates for 
the pajTnent of the semiannual interest on the respective bonds 
so presented for conversion, last preceding the date of such 
presentation." 

Sec. 4. That the last sentence of section five of said Act 
approved September twenty-fourth, nineteen hundred and 
seventeen, be, and is hereby, amended to read as follows : 

" The sum of such certificates outstanding hereunder and 
under section six of said Act approved April twenty-fourth, 
nineteen hundred and seventeen, shall not at any one time 
exceed in the aggregate $8,000,000,000." 

Sec. 5. That section eight of said Act approved Septem- 
ber twenty-fourth, nineteen hundred and seventeen, be, and is 
hereby, amended to read as follow^s: 

" Sec. 8. That the Secretary of the Treasury, in his dis- 
cretion, is hereby authorized to deposit, in such incorporated 
banks and trust companies as he may designate, the proceeds, 
or any part thereof, arising from, the sale of the bonds and 
certificates of indebtedness and war-savings certificates author- 
ized by this Act, and arising from the paAonent of income 
and excess profits taxes, and such deposits shall bear such 
rate or rates of interest, and shall be secured in such manner, 
and shall be made upon and subject to such terms and condi- 
tions as the Secretary of the Treasury may from time to 
time i^rescribe: Provided, That the provisions of section fiftj^- 
one hundred and ninet3^-one of the Revised Statutes, as 
amended by the Federal Reserve Act, and the amendments 
thereof, Avith reference to the reserves required to be kept by 
national banking associations and other member banks of the 

460 



LIBERTY BOND ACTS 

Federal Reserve System, shall not apply to deposits of public 
moneys by the United States in designated depositaries. The 
Secretary of the Treasury is hereby authorized to designate 
depositaries in foreign countries with which shall be deposited 
all public money which it may be necessary or desirable to 
have on dejDosit in such countries to provide for current 
disbursements to the military and naval forces of the United 
States and to the diplomatic and consular and other repre- 
sentatives of the United States in and about such countries 
until six months after the termination of the war between the 
United States and the Imperial German Government, and to 
prescribe the terms and conditions of such deposits." 

Sec. 6. That said Act approved September twenty-fourth, 
nineteen hundred and seventeen, is hereby amended by adding 
four new sections, to read as follows : 

" Sec. 14. That any bonds of the United States bearing 
interest at a higher rate than four per centum per annum 
(whether issued under section one of this Act or upon conver- 
sion of bonds issued under this Act or under said Act approved 
April twenty-fourth, nineteen hundred and seventeen), which 
have been owned by any person continuously for at least 
six months prior to the date of his death, and which upon 
such date constitute part of his estate, shall, under rules and 
regulations prescribed by the Secretary of the Treasury, be 
receivable by the United States at par and accrued interest in 
payment of any estate or inheritance taxes imposed by the 
United States, under or by virtue of any present or future law 
upon such estate or the inheritance thereof. 

" Sec. 15. That the Secretary of the Treasury is author- 
ized, from time to time, until the expiration of one year after 
the termination of the war, to purchase bonds issued under 
authority of this Act, including bonds issued upon conversion 
of bonds issued under this Act or said Act approved April 
twenty-fourth, nineteen hundred and seventeen, at such prices 
and upon such terms and conditions as he may prescribe The 
par amount of bonds of any such series which may be pur- 
chased in the twelve months' period beginning on the date 
of issue shall not exceed one-twentieth of the par amount of 
bonds of such series originally issued, and in each twelve 
months' period thereafter shall not exceed one-twentieth of 
the amount of the bonds of such series outstanding at the 

461 



WAR COSTS AND THEIR FINANCING 

beginning of such twelve months' period. The average cost 
of the bonds of any series purchased in any such twelve 
months' period shall not exceed par and accrued interest. 

" For the purposes of this section the Secretarj^ of the 
Treasury shall set aside, out of any money in the Treasury 
not otherwise approioriated, a sum not exceeding one-twentieth 
of the amount of such bonds issued before April first, nineteen 
hundred and eighteen, and as and when any more such bonds 
are issued he shall set aside a sum not exceeding one-twentieth 
thereof. Whenever, by reason of purchases of bonds, as pro- 
vided in this section, the amount so set aside falls beloAV the 
sum which he deems necessary for the pur]30ses of this section, 
the Secretary of the Treasury shall set aside such amount as 
he shall deem necessary, but not more than enough to bring 
the entire amount so set aside at such time up to one-twentieth 
of the amount of such bonds then outstanding. The amount 
so set aside bj^ the Secretary of the Treasury is hereby 
appropriated for the purposes of this section, to be available 
until the expiration of one year after the termination of the 
war. 

" The Secretary of the Treasury shall make to Congress at 
the beginning of each regular session a report including a 
detailed statement of the operations under this section. 

" Sec. 16. That any of the bonds or certificates of in- 
debtedness authorized by this Act may be issued by the 
Secretary of the Treasurj^ paj^able, principal and interest, in 
any foreign money or foreign moneys, as expressed in such 
bonds or certificates, but not also in United States gold coin, 
and he may dispose of such bonds or certificates in such 
manner and at such prices, not less than par, as he may deter- 
mine, without compliance with the provisions of the thijd 
paragraph of section one. In determining the amount of 
bonds and certificates issuable under this Act the dollar 
equivalent of this amount of any bonds or certificates paj^able 
in foreign money or foreign moneys shall be determined by 
the par of exchange at the date of issue thereof, as estimated 
by the Director of the Mint, and proclaimed by the Secretary 
of the Treasury, in pursuance of the provisions of section 
tw^enty-five of the Act approved August twenty-seventh, 
eighteen hundred and ninety-four, entitled ' An Act to reduce 
taxation, to provide revenue for the Government, and for 

462 



LIBERTY BOND ACTS 

other purposes/ The Secretary of the Treasury may desig- 
nate depositaries in foreign countries, with which may be 
deposited as he may determine all or any j^art of the proceeds 
of any bonds or certificates authorized by this Act, payable 
in foreign money or foreign moneys. 

" Sec. 17. That the short title of this Act shall be 
' Second Liberty Bond Act.' " 

Sec. 7. That the Act entitled " An Act to authorize an 
issue of bonds to meet expenditures for the national security 
and defense, and, for the purpose of assisting in the prosecu- 
tion of the war, to extend credit to foreign governments, and 
for other purposes," approved April twenty-fourth, nineteen 
hundred and seventeen, is hereby amended by adding a new 
section to read as follows: 

" Sec. 9. That the short title of this Act shall be ' First 
Liberty Bond Act.' " 

Sec. 8. That the short title of this Act shall be " Third 
Liberty Bond Act." 

Approved, April 4, 1918. 

FouETH Liberty Bond Act 

An Act To authorize an additional issue of bonds to meet 
expenditures for the national security and defense, and, for 
the purpose of assisting in the prosecution of the war, to 
extend additional credit to foreign Governments, and for 
other purposes. 

Be it enacted by the Senate and House of Bepresentatives 
of the United States of America in Congress assembled, That 
section one of the Second Liberty Bond Act, as amended by 
the Third Liberty Bond Act, is hereby further amended by 
striking out the figures " $12,000,000,000 " and inserting in 
lieu thereof the figures " $20,000,000,000." 

Sec. 2. That section two of the Second Liberty Bond Act, 
as amended by the Third Liberty Bond Act, is hereby further 
amended by striking out the figures " $5,500,000,000 " and 
inserting in lieu thereof the figures " $7,000,000,000." 

Sec. 3. That notwithstanding the provisions of the Second 
Liberty Bond Act, as amended by the Third Liberty Bond Act, 
or of the War Finance Corporation Act, bonds and certificates 

463 



WAR COSTS AND THEIR FINANCING 

of indebtedness of the United States payable in any foreign 
money or foreign moneys, and bonds of the War Finance 
Corporation payable in any foreign money or foreign moneys 
exclusively or in the alternative, shall, if and to the extent 
expressed in such bonds at the time of their issue, with the 
approval of the Secretary of the Treasury, while beneficially 
owned by a nonresident alien individual, or by a foreign 
corporation, partnership, or association, not engaged in busi- 
ness in the United States, be exempt both as to principal and 
interest from any and all taxation now or hereafter imposed 
by the United States, any State, or any of the possessions of 
the United States, or by any local taxing authority. 

Sec. 4. That any incorporated bank or trust company 
designated as a depositary by the Secretary of the Treasury 
under the authority conferred by section eight of the Second 
Liberty Bond Act, as amended by the Third Liberty Bond 
Act, which gives security for such deposits as, and to amounts, 
by him prescribed, may, upon and subject to such terms 
and conditions as the Secretary of the Treasury may prescribe, 
act as a fiscal agent of the United States in connection w^ith 
the operations of selling and delivering any bonds, certificates 
of indebtedness or war savings certificates of the United States. 

Sec. 5. That the short title of this Act shall be " Fourth 
Liberty Bond Act." 

Approved, July 9, 1918. 

ViCTOET Liberty Loan Act 

An Act To amend the Liberty Bond Acts and the War Finance 
Corporation Act, and for other purposes. 

Be it enacted by the Senate and House of Representatives 
of the United States of America in Congress assembled, That 
the Second Liberty Bond Act is hereby amended by adding 
thereto a new section to read as follows: 

" Sec. 18. (a) That in addition to the bonds and certifi- 
cates of indebtedness and war-savings certificates authorized 
by this Act and amendments thereto, the Secretary of the 
Treasury, with the approval of the President, is authorized to 
borrow from time to time on the credit of the United States 
for the purposes of this Act, and to meet public expenditures 

464 



LIBERTY BOND ACTS 

authorized by law, not exceeding in the aggregate $7,000,000,- 
000, and to issue therefor notes of the United States at not 
less than par in such form or forms and denomination or 
denominations, containing such terms and conditions, and 
at such rate or rates of interest, as the Secretary of the 
Treasury may prescribe, and each series of notes so issued 
shall be payable at such time not less than one j^ear nor more 
than five years from the date of its issue as he may prescribe, 
and may be redeemable before maturity (at the option of the 
United States) in whole or in part, upon not more than one 
year's nor less than four month's notice, and under such rules 
and regulations and during such period as he may prescribe. 

"(b) The notes herein authorized may be issued in any 
one or more of the following series as the Secretary of the 
Treasury may prescribe in connection with the issue thereof: 

"(1) Exempt, both as to principal and interest, from all 
taxation (except estate or inheritance taxes) now or hereafter 
imposed by the United States, any State, or any of the 
possessions of the United States, or by any local taxing 
authority ; 

"(2) Exempt, both as to principal and interest, from all 
taxation now or hereafter imposed by the United States, any 
State, or any of the possessions of the United States, or by 
any local taxing authority, except (a) estate or inheritance 
taxes, and (b) graduated additional income taxes, commonly 
known as surtaxes, and excess profits and war profits taxes, 
now or hereafter imposed by the United States, upon the 
income or profits of individuals, partnerships, associations, or 
corporations ; 

"(3) Exempt, both as to principal and interest, as provided 
in paragraph (2) ; and with an additional exemption from 
the taxes referred to in clause (b) of such paragraph, of the 
interest on an amount of such notes the principal of which 
does not exceed $30,000, owned by any individual, partnership, 
association, or corporation; or 

"(4) Exempt, both as to principal and interest, from all 
taxation now or hereafter imposed by the United States, any 
State, or any of the possessions of the United States, or by 
any local taxing authority, except (a) estate or inheritance 
taxes, and (b) all income, excess profits, and war profits taxes, 
now or hereafter imposed bv the United States, upon the 

465 



WAR COSTS AND THEIR FINANCING 

income or profits of individuals, partnership, associations, or 
corporations. 

"(c) If tlie notes authorized under this section are offered 
in more than one series bearing the same date of issue, the 
holder of notes of any such series shall (under such rules 
and regulations as may be prescribed by the Secretary of the 
Treasury) have the option of having such notes held by him 
converted at par into notes of any other such series offered 
bearing the same date of issue. 

"(d) None of the notes authorized by this section shall bear 
the circulation privilege. The principal and interest thereof 
shall be payable in United States gold coin of the present 
standard of value. The word ^ bond ' or ^ bonds ' where it 
appears in sections 8, 9, 10, 14, and 15 of this Act as amended, 
and sections 3702, 3703, 3704, and 3705 of the Revised 
Statutes, and section 5200 of the Revised Statutes as amended, 
but in such sections only, shall be deemed to include notes 
issued under this section." 

Sec. 2. (a) That until the exj^iration of five years after 
the date of the termination of the war between the United 
States and the German Government, as fixed by proclamation 
of the President, in addition to the exemptions provided in 
section 7 of the Second Liberty Bond Act in respect to the 
interest on an amount of bonds and certificates, authorized 
by such Act and amendments thereto, the principal of which 
does not exceed in the agregate $5,000, and in addition to 
all other exemptions provided in the Second Liberty Bond 
Act or the Supplement to Second Liberty Bond Act, the 
interest received on and after January 1, 1919, on an amount 
of bonds of the First Liberty Loan converted, dated November 
15, 1917, May 9, 1918, or October 24, 1918, the Second Liberty 
Loan, converted and unconverted, the Third Liberty Loan, 
and the Fourth Liberty Loan, the principal of which does not 
exceed $30,000 in the aggregate, o^^^led by any individual, 
partnership, association, or corporation, shall be exem.pt from 
graduated additional income taxes, commonly known as sur- 
taxes, and excess profits and war profits taxes, now or here- 
after imposed by the United States, upon the income or profits 
of individuals, partnerships, associations, or corporations. 

(b) In addition to the exemption provided in subdivision 
(a), and in addition to the other exemptions therein referred 

466 



LIBERTY BOND ACTS 

to, the interest received on and after January 1, 1919, on 
any amount of the bonds therein specified the principal of 
which does not exceed $20,000 in the aggregate, owned by any 
individual, partnership, association, or corporation, shall be 
exempt from the taxes therein specified; Provided, That no 
owner of such bonds shall be entitled to such exemption in 
respect to the interest on an aggregate principal amount of 
such bonds exceeding three times the principal amount of 
notes of the Victory Liberty Loan originally subscribed for by 
such owner and still owned by him at the date of his tax 
return. 

Sec. 3. That section 5 of the Second Liberty Bond Act, 
as amended by section 4 of the Third Liberty Bond Act, 
is hereby further amended by striking out the figures 
" $8,000,000,000 " and inserting in lieu thereof the figures 
" $10,000,000,000." 

Sec. 4. That section 3 of the Fourth Liberty Bond Act 
is hereby amended to read as follows : 

" Sec. 3. That, notwithstanding the provisions of the 
Second Liberty Bond Act or of the War Finance Corporation 
Act or of any other Act, bonds, notes, and certificates of 
indebtedness of the United States and bonds of the War 
Finance Corporation shall, while beneficially owned by a 
nonresident alien individual, or a foreign corporation, part- 
nership, or association, not engaged in business in the United 
States, be exempt both as to principal and interest from any 
and all taxation now or hereafter imposed by the United 
States, any State, or any of the possessions of the United 
States or by any local taxing authority." 

Sec. 5. That the privilege of converting the 4 per centuta 
bonds of the First Liberty Loan converted and 4 per centum 
bonds of the Second Liberty Loan into 4^ per centum bonds, 
which privilege arose on May 9, 1918, and expired on Novem- 
ber 9, 1918, may be extended by the Secretary of the Treasury 
for such period, upon such teniis and conditions and subject 
to such rules and regulations, as he may prescribe. For the 
purpose of computing the amount of interest payable, bonds 
presented for conversion under any such extension shall be 
deemed to be converted on the dates for the payment of the 
semiannual interest on the respective bonds so presented for 
conversion next succeeding the date of such presentation. 

467 



WAR COSTS AND THEIR FINANCING 

Sec. 6. (a) That there is hereby created in the Treasury 
a cumulative sinking fund for the retirement of bonds and 
notes issued under the First Liberty Bond Act, the Second 
Liberty Bond Act, the Third Libertj^ Bond Act, the Fourth 
Liberty Bond Act, or under this Act, and outstanding on 
July 1, 1920. The sinldng fund and all additions thereto are 
hereby appropriated for the payment of such bonds and notes 
at maturity, or for the redemption or purchase thereof before 
maturity by the Secretary of the Treasury at such prices and 
upon such terms and conditions as he shall prescribe, and 
shall be available until all such bonds and notes are retired. 
The average cost of the bonds and notes purchased shall 
not exceed par and accrued interest. Bonds and notes pur- 
chased, redeemed, or paid out of the sinking fund shall be 
canceled and retired and shall not be reissued. For the fiscal 
year beginning July 1, 1920, and for each fiscal year thereafter 
until all such bonds and notes are retired there is hereby 
appropriated, out of any money in the Treasury not other- 
wise apj)ropriated, for the purposes of such sinking fund, 
an amount equal to the sum of (1) 2^ per centum of the 
aggregate amount of such bonds and notes outstanding on 
July 1, 1920, less an amount equal to the par amount of any 
obligations of foreign governments held by the United States 
on July 1, 1920, and (2) the interest which would have been 
payable during the fiscal year for which the appropriation is 
made on the bonds and notes purchased, redeemed, or paid 
out of the sinking fund during such year or in previous years. 

The Secretary of the Treasury shall submit to Congress 
at the beginning of each regular session a separate annual 
report of the action taken under the authority contained 
in the section. 

(b) Sections 3688, 3694, 3695, and 3696 of the Revised 
Statutes, and so much of section 3689 of the Revised 
1 jDer centum of the entire debt of the LTnited States to be 
set apart as a sinking fund, are hereb}^ repealed. 

Sec. 7. (a) That until the expiration of eighteen months 
after the termination of the war between the United States 
and the German Government, as fixed by proclamation of the 
President, the Secretary of the Treasury, with the approval 
of the President, is hereby authorized on behalf of the United 

468 



LIBERTY BOND ACTS 

States to establish, in addition to the credits authorized by 
section 2 of the Second Liberty Bond Act, as amended, credits 
with the United States for any foreign Government now 
engaged in war with the enemies of the United States, for the 
purpose only of providing for purchases of any property 
owned directly or indirectly by the United States, not needed 
by the United States, or of any wheat the price of which has 
been or may be guaranteed by the United States. To the 
extent of the credits so established from time to time the 
Secretary of the Treasury is hereby authorized to make 
advances to or for the account of any such foreign government 
and to receive at par from such foreign government for the 
amount of any such advances its obligations hereafter issued 
bearing such rate or rates of interest, not less than 5 per 
centum per annum, maturing at such date or dates, not later 
than October 15, 1938, and containing such terms and condi- 
tions, as the Secretary of the Treasury may from time to time 
prescribe. The Secretary, with the approval of the President, 
is hereby authorized to enter into such arrangements from 
time to time with any such foreign government as may be 
necessary or desirable for establishing such credits and for 
the payment of such obligations before maturity. 

(b) The Secretary of the Treasury is hereby authorized 
from time to time to convert any short time obligations of 
foreign governments which may be received under the 
authority of this section into long time obligations of such 
foreign governments, respectively, maturing not later than 
October 15, 1938, and in such form and terms as the Secretary 
of the Treasury may prescribe; but the rate or rates of 
interest borne by any such long time obligations at the time 
of their acquisition shall not be less than the rate borne by 
the short time obligations so converted into such long time 
obligations; and, under such terms and conditions as he may 
from time to time prescribe, to receive paj^ment, on or before 
maturity, of any obligations of such foreign governments 
acquired on behalf of the United States under authority of 
this section, and, with the approval of the President, to sell 
any of such obligations (but not at less than par with accrued 
interest unless otherwise hereafter provided by law), and to 
apply the proceeds thereof, and any payments so received 
from foreign governments on account of the principal of 

469 



WAR COSTS AND THEIR FINANCING 

such obligations, to the redemption or purchase, at not more 
than par and accrued interest, of any bonds of the United 
States issued under the authority of the First Liberty Bond 
Act or Second Liberty Bond A«t as amended and supple- 
mented, and if such bonds can not be so redeemed or pur- 
chased, the Secretary of the Treasury shall redeem or purchase 
any other outstanding interest-bearing obligations of the 
United States which may at such time be subject to redemption 
or which can be purchased at not more than par and accrued 
interest. 

(c) For the purposes of this section there is appropriated 
the unexpended balance of the appropriations made by sec- 
tion 2 of the First Liberty Bond Act and by section 2 of the 
Second Liberty Bond Act as amended by the Third Liberty 
Bond Act and the Fourth Liberty Bond Act, but nothing in 
this section shall be deemed to prohibit the use of such unex- 
pended balance of any part thereof for the purpose of section 
2 of the Second Liberty Bond Act, as so amended, subject to 
the limitations therein contained. 

Sec. 8. That the obligations of foreign governments 
acquired by the Secretary of the Treasury by virtue of the 
provisions of the First Liberty Bond Act and the Second 
Liberty Bond Act, and amendments and supplements thereto, 
shall mature at such dates as shall be determined by the 
Secretary of the Treasury: Provided, That such obligations 
acquired by virtue of the provisions of the First Liberty 
Bond Act, or through the conversion of short time obligations 
acquired under such act, shall mature not later than June 15, 
1947, and all other such obligations of foreign governments 
shall mature not later than October 15, 1938. 

Sec. 9. That the War Finance Corporation Act is hereby 
amended by adding to Title I thereof of a new section, to 
read as follows: 

" Sec. 21. (a) That the corporation shall be empowered 
and authorized, in order to promote commerce with foreign 
nations through the extension of credits, to make advances 
upon such terms, not inconsistent with the provisions of this 
section, as it may prescribe, for periods not exceeding five 
years from the respective date of such advances : 

"(1) To any person, firm, corporation, or association 
engaged in the business in the United States of exporting 

470 



LIBERTY BOND ACTS 

therefrom domestic products to foreign countries, if such 
person, firm, corporation, or association is, in the opinion of 
the board of directors of the corporation, unable to obtain 
funds upon reasonable terms through banking channels. Any 
such advance shall be made only for the purpose of assisting 
in the exportation of such products, and shall be limited 
in amount to not more than the contract price therefor, 
including insurance and carrying or transportation charges 
to the foreign point of destination if and to the extent 
that such insurance carrying or transportation charges are 
payable in the United States by such exporter to domestic 
insurers and carriers. The rate of interest charged on any 
advance shall not be less than 1 per centum per annum in 
excess of the rate of discount for ninety-day commercial 
paper prevailing at the time of such advance at the Federal 
reserve bank of the district in which the borrower is located 
and 

"(2) To any bank, banker, or trust company in the United 
States which after this section takes effect makes an advance 
to any such person, firm, corporation, or association for the 
purpose of assisting in the exportation of such products. Any 
such advance shall not exceed the amount remaining unpaid 
of the advances made by such bank, banker, or trust company 
to such person, firm, corporation, or association for such 
purpose. 

"(b) The aggregate of the advances made by the corpo- 
ration under this section remaining unpaid shall never at any 
time exceed the sum of $1,000,000,000. 

"(c) Notwithstanding the limitation of section 1 the ad- 
vances provided for by this section may be made until the 
expiration of one year after the termination of the war 
between the United States and the German Government as 
fixed by proclamation of the President. Any such advances 
made by the corporation shall be made upon the promissory 
note or notes of the borrower, with full and adequate security 
in each instance by indorsement, guaranty, or otherwise. The 
corporation shall retain power to require additional security 
at any time. The corporation in its discretion may upon 
like security extend the time of payments of any such advance 
through renewals, the substitution of new obligations, or 
otherwise, but the time for the payment of any such advance 

471 



WAR COSTS AND THEIR FINANCING 

shall not be extended beyond five years from the date on 
which it was originally made." 

Sec. 10. That section 15 of the War Finance Corporation 
Act is hereby amended to read as follows : 

" Sec. 15. That all net earnings of the corporation not 
required for its operations shall be accumulated as a reserve 
fund until such time as the coriDoration liquidates under 
the terms of this title. Such reserve fund shall, upon the 
direction of the board of directors, with the approval of 
the Secretary of the Treasury, be invested in bonds and 
obligations of the United States, issued or converted after 
September 24, 1917, or upon like directions and approval 
may be deposited in member banks of the Federal Reserve 
System, or in any of the Federal Reserve Banks, or be used 
from time to time, as well as any other funds of the corpo- 
ration, in the purchase or redemption of any bonds issued 
by the corporation. The Federal Reserve Banks are hereby 
authorized to act as depositaries for and as fiscal agents of 
the corporation in the general performance of the powers 
conferred by this title. Beginning twelve months after the 
termination of the war, the date of such termination to be 
fixed by a proclamation of the President of the United States, 
the directors of the corporation shall proceed to liquidate its 
assets and to wind up its affairs, but the directors of the 
corporation, in their discretion, may, from time to time, 
prior to such date, sell and dispose of any securities or 
other property acquired by the corporation. Any balance 
remaining after the payment of all its debts shall be paid 
into the Treasury of the United States as miscellaneous 
receipts, and thereupon the corporation shall be dissolved.'' 

Sec. 11. That the short title of this act shall be " Victory 
Liberty Loan Act." 

Approved March 3, 1919. 



APPENDIX V 



TAXATION IN THE UNITED STATES 



Income Taxation 

A general review of the increase in the number of 
returns and income reported for the years since the 
inception of the present epoch of income taxation is 
given in the following comparative tables : 



Net Income from Personal Returns, Calendar Years 
1913-1917 



Year 


Number of 
returns 


Net income 


Increase from 
year to year 


1913 


1357,598 
1357,515 
1336,652 
1437,036 

* 3,472,890 


2 $3,900,000,000 

2 4,000,000,000 

2 4,600,000,000 

6,300,000,000 

13,700,000,000 




1914 

1915 

1916 

1917. 


$100,000,000 

600,000,000 

1,700,000,000 

7,400,000,000 



1 Returns reporting net incomes of $3,000 and over. 

2 Determined on the basis of the number of returns filed and the 
average net income in each class. 

s Returns reporting net incomes of $1,000 and over. 

Income Tax Yield from Personal Returns, Calendar Years 
1913-1917 



Year 


Normal tax 


Surtax 


War excess- 
profits tax 


Total tax 


1913 1 


$12,728,038 
16,559,493 
23,995,777 
51,440,558 

140,653,937 


$15,525,497 

24,486,669 

43,947,818 

121,946,136 

433,345,732 




$28,253,535 


1914 1 




41,046,162 


1915 1 




67,943,595 


1916 2 




173,386,694 


1917 3 


$ioi,249,78i 


675,249,450 



Annual reports of the Commissioner of Internal Revenue for the 
fiscal years ended June 30 immediately following the years shown 
above. Net incomes, $3,000 and over. 

2 Statistics of income, compiled from the returns filed for 1916. 
Net incomes, $3,000 and over. 

3 Net incomes, $2,000 and over. 

473 



WAR COSTS AND THEIR FINANCING 

Number of Personal Returns, Calendar Years 1914-1917, by 
Income Classes i 



Income Classes 


1914 


1915 


1916 


1917 


$1,000 to $2,000 








1,640,758 


$2,000 to $2,500 








480,486 


$2,500 to $3,000 









358,221 


$3,000 to $4,000 


82,754 


69,045 


85,i22 


374,958 


$4,000 to $5,000 


66,525 


58,949 


72,027 


185,805 


$5,000 to $10,000 


127,448 


120,402 


150,553 


270,666 


$10,000 to $15,000 


34,141 


34,102 


45,309 


65,800 


$15,000 to $20,000 


15,790 


16,475 


22,618 


29,896 


$20,000 to $25,000 


8,672 


9,707 


12,953 


16,806 


$25,000 to $30,000 


5,483 


6,196 


8,055 


10,571 


$30,000 to $40,000 


6,008 


7,005 


10,038 


12,733 


$40,000 to $50,000 


3,185 


4,100 


5,611 


7,087 


$50,000 to $100,000 


5,161 


6,847 


10,452 


12,439 


$100,000 to $150,000.... 


1,189 


1,793 


2,900 


3,302 


$150,000 to $200,000.... 


403 


724 


1,234 


1,302 


$200,000 to $250,000.... 


233 


386 


726 


703 


$250,000 to $300,000.... 


130 


216 


427 


342 


$300,000 to $400,000.... 


147 


254 


439 


380 


$400,000 to $500,000.... 


69 


122 


245 


179 


$500,000 to $1,000,000. . 


114 


209 


376 


315 


$1,000,000 and over 


60 


120 


206 


141 


Marrierl women making 










returns separate from 










husbands 


(2) 


(^) 


2 7,635 


(i) 






Total number of re- 










turns filed 


357,515 


336.652 


437,036 


3,472,890 



1 The returns for 1913 are omitted, as they pertain only to the last 
10 months of that year. 

2 The net incomes reported on separate returns made by husband 
and wife in 1916 are combined and included as one return in the 
figures for the several classes. In 1914, 1915, and 1917 the returns 
of married women filed separately are included in their individual 
income classes independently of husband's income. 



TAXATION IN THE UNITED STATES 



Income Tax Rates 
ACT OF 1913 



Income 



I Normal Surtax 



$4,000 and over . . 
$20,000-$50,000.. 
$50,00(>-$75,000.. 
$75,000-$ 100,000. 
$100.000-$250,000 
$250,000-$500,000 
$500,000 and over 



Total 



ACT OF 1916 



Income 



$4,000 and over 

$20,000-$40,000 

$40,00O-$60,000 

$60,000-$80,000 

$80,000-$ 100,000.... 
$100,000-150,000. . . . 
$150,000-$200,000... 
$200,000-$250,000... 
$250,00O-$300,000... 
$30O,00O-$500,000... 
$500,000-$l,000,000.. 
$1,000,00{>-$1,500,000 
$l,500,000-$2,000,000 
$2,000,000 and over.. 



Normal 


Surtax 


2 




2 


1 


2 


2 


2 


3 


2 


4 


2 


5 


2 


6 


2 


7 


2 


8 


2 


9 


2 


10 


2 


11 


2 


12 


2 


13 



Total 



2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 



WAR COSTS AND THEIR FINANCING 



Income Tax Rates- 
act OP 1917 



-Continued 





Normal 


Addi- 


Surtax 


Addi- 




Income 


(Act of 


tional 


(Act of 


tional 


Total 




1916) 


normal 


1916) 


surtax 




$2,000 and over 




2 






2 


$4,000 and over 


2 


2 






4 


$5,000-$7,500 


2 


2 




i 


5 


$7,500-$10,000 


2 


2 




2 


6 


$10,000-$ 12,500 


2 


2 




3 


7 


$12,500-$ 15,000 


2 


2 




4 


8 


$15,000-$20,000 


2 


2 




5 


9 


$20,000-$40,000 


2 


2 


i 


7 


12 


$40,000-$60,000 


2 


2 


2 


10 


16 


$60,000-$80,000 


2 


2 


3 


14 


21 


$80,000-$100,000 


2 


2 


4 


18 


26 


$100,000-$ 150,000 


2 


2 


5 


22 


31 


$150,000-$200,000 


2 


2 


6 


25 


35 


$200,000-$250,000 


2 


2 


7 


30 


41 


$250,000-$300,000 


2 


2 


8 


34 


46 


$300,000-$500,000 


2 


2 


9 


37 


50 


$500,000-$750,000 


2 


2 


10 


40 


54 


$750,000-$l,000,000... 


2 


2 


10 


45 


59 


$1,000,000-$1,500,000. . 


2 


2 


11 


50 


65 


$1,500,000-$2,000,000. . 


2 


2 


12 


50 


66 


$2,000,000 and over . . . 


2 


2 


13 


50 


67 



ACT OF 1919 







Normal 






Total 


Income 


Normal 
(1918) 


(1919 

and 

after) 


Surtax 


Total 
(1918) 


(1919 

and 

after) 


$2,000-$5,000 


6 


4 




6 


4 


$5,000-$6,000 


6 


4 


i 


7 


5 


$6,00O-$8,O00 


12 


8 


2 


14 


10 


$8,00O-$10,000 


12 


8 


3 


15 


11 


$10,000-$ 12,000 


12 


8 


4 


16 


12 


$12,000-$ 14,000 


12 


8 


5 


17 


13 


$14,000-$16,000 


12 


8 


6 


18 


14 


$16,000-$18,000 


12 


8 


7 


19 


15 


$18,000-$20,000 


12 


8 


8 


20 


16 


$20,000-$22,000 


12 


8 


9 


21 


17 



476 



TAXATION IN THE UNITED STATES 



ACT OP 1919 — Continued 







Normal 






Total 




Normal 


(1919 


Surtax 


Total 


(1919 


Income 


(1918) 


and 
after) 




(1918) 


and 
after) 


$22,000-$24,000 


12 


8 


10 


22 


18 


$24,000-$26,000 


12 


8 


11 


23 


19 


$26,000-$28,000 


12 


8 


12 


24 


20 


$28,000-S30,000 


12 


8 


13 


25 


21 


S30,000-$32,000 


12 


8 


14 


26 


22 


$32,000-S34,000 


12 


8 


15 


27 


23 


$34,000-$36,000 


12 


8 


16 


28 


24 


$36,000-S38,000 


12 


8 


17 


29 


25 


S38,000-$40,000 


12 


8 


18 


30 


26 


$40,000-142,000 


12 


8 


19 


31 


27 


$42,000-$44,000 


12 


8 


20 


32 


28 


$44,000-146,000 


12 


8 


21 


33 


29 


$46,000-148,000 


12 


8 


22 


34 


30 


$48,000-$50,000 


12 


8 


23 


35 


31 


$50,000-$52,000 


12 


8 


24 


36 


32 


$52,000-$54,000 


12 


8 


25 


37 


33 


$54,000-$56,000 


12 


8 


26 


38 


34 


$56,000-$58,000 


12 


8 


27 


39 


35 


$58,000-$60,000 


12 


8 


28 


40 


36 


$60,000-$62,000 


12 


8 


29 


41 


37 


$62,000-$64,000 


12 


8 


30 


42 


38 


$64,000-$66,000 


12 


8 


31 


43 


39 


$66.000-$68,000 


12 


8 


32 


44 


40 


$68,000-$70,000 


12 


8 


33 


45 


41 


$70,000-$72,000 


12 


8 


34 


46 


42 


$72,000-$74,000 


12 


8 


35 


47 


43 


$74,000-176,000 


12 


8 


36 


48 


44 


$76,000-$78,000 


12 


8 


37 


49 


45 


$78,000-180,000 


12 


8 


38 


50 


46 


$80,000-$82,000 


12 


8 


39 


51 


47 


$82,000-184,000 


12 


8 


40 


52 


48 


$84,000-186,000 


12 


8 


41 


53 


49 


$86,000-188,000 


12 


8 


42 


54 


50 


$88,000-$90,000 


12 


8 


43 


55 


51 


$90,000-$92,000 


12 


8 


44 


56 


52 


$92,000-$94,000 


12 


8 


45 


57 


53 


$94,000-$96,000 


12 


8 


46 


58 


54 


$96,000-$98,000 


12 


8 


47 


59 


55 


$98,000-$100,000... 


12 


8 


48 


60 


56 


$100,000-$150,000. . . 


12 


8 


52 


64 


60 


$150,000-8200,000. . . 


12 


8 


56 


68 


64 


$200,000-1300,000. . . 


12 


8 


60 


72 


68 


$300,000-$500,000. . . 


12 


8 


63 


75 


71 


$oOO,000-$l, 000,000. 


12 


8 


64 


76 


72 


$1,000,000 and over. 


1 12 


I 8 


65 


77 


73 



477 



WAR COSTS AND THEIR FINANCING 

Estate Taxes Levied in the United States, 1916-1919 



Net Estate 


Act of 
1916 


Act of 
March 
3, 1917 


Act of 
October 
3, 1917 


Act of 
1919 


Not exceeding $50,000 

$50 000-$ 150,000. 


1 

2 

3 

4 

5 

5 

6 

6 

7 

8 

9 

10 

10 

10 


1.5 

3 

4.5 

6 

7.5 

7.5 

9 

9 

10.5 
12 

13.5 
15 
15 
15 


2 

4 

6 

8 

10 

10 

12 

12 

14 

16 

18 

20 

22 

25 


1 
2 


$150,000-$250,000 


3 


$250,000-$450,000 


4 


$450 000-$750,000 


6 


$750,000-$l,000,000 

$1,000,000-$1,500,000 

$1,500,000-$2,000,000 

$2,000,000-$3,000,000 

$3,000,000-$4,000,000 

$4,000,000-$5,000,000 

$5,000,000-$8,000,000 

$8,000,000-$10,000,000 

In excess of $10,000,000 


8 
10 
12 
14 
16 
18 
20 
22 
25 



TAXATION IN THE UNITED STATES 






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WAR COSTS AND THEIR FINANCING 





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WAR COSTS AND THEIR FINANCING 









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TAXATION IN THE UNITED STATES 






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485 



WAR COSTS AND THEIR FINANCING 



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WAR COSTS AND THEIR FINANCING 



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488 






APPENDIX VI 

PUBLIC DEBT OF THE UNITED STATES 

The following is a summary of the public debt of the 
United States Government as it stood on June 30, 1919 ; 

Summary op the Public Debt, June 30, 1919 

gross debt 

Debt bearing no interest $236,428,774.69 

Debt on which interest has ceased 11 , 109 , 370 . 26 

Interest-bearing debt 25,234,496,273.54 

Gross debt $25,482,034,418.49 

NET DEBT 

Gross debt $25,482,034,418 .49 

Deduct — 

Balance free of current obligations 1 , 002 , 732 , 042 . 00 

Net debt $24,479,302,376.49 



In the following table are given the details as to the 
interest-bearing debt as it stood on June 30, 1919 : 



WAR COSTS AND THEIR FINANCING 



INTEREST-BEARING DEBT, 



Title of loan 


Rate. 


When 


When redeemable or 


Interest 


xitic \Ji. J.ua,j-i 


per cent 


issued 


payable 


payable 


Consols of 1930 


2 


1900 


Payable after Apr. 1, 
1930. 


Jan., Apr., 
July, Oct. 


Loan of 1925 


4 


1895-96 


Payable after Feb. 1, 
1925. 


Feb., May, 
Aug., Nov 


Panama Canal loan of 1 


2 


1906 


Redeemable after Aug. 
1, 1916. 


1 


1916-1936. i 




do 








Payable Aug. 1, 1936. 




Panama Canal loan of \ 


..do.... 




' Redeemable after Nov. 




1918-1938. / 


1908 


1, 1918. 


do 








1 Payable Nov. 1, 1938. 




Panama Canal loan of 1 


3 


1911 


Payable June 1, 1961. 


\ Mar., June, 


1961. J 






/ Sept., Dec. 


Conversion bonds 


...do... 


1916-17 


Payable 30 years from 
date of issue. 


Jan., Apr., 
July, Oct. 


Certificates of indebt- 1 


\ arious . 


1918-19 


Various, not exceed- 


At maturity 


edness (various). i 






ing 1 year from date 
of issue. 


or earlier. 


Certificates of indebt- 1 
eduess. J 


2 


1918-19 


f 1 year from date of 

1 issue. 

1 Redeemable on or 


Jan., July. 


First Liberty loan . . . 


3^ 


1917 


i after .June 15, 1932. 

Payable June 15, 1947. 

1 Redeemable on or after 


June, Dec. 


First Liberty loan 1 


4 


1917 


\ June 15. 1932. 
(Payable June 15,1947. 


....do.... 


converted. J 














I Redeemable on or after 




Do 


41- 


1918 


\ June 15, 1932. 

I Payable June 15, 1947. 

1 Redeemable on or after 


June, Dec. 


First Libert J' loan \ 


.. .do.. . 


1918 


i June 15, 1932. 


....do.... 


second converted, j 




Payable June 15. 1947. 










Redeemable on or after 




Second Liberty loan . 


4 


1917 


\ Nov. 15, 1927. 

[ Payable Nov. 15, 1942. 


May, Nov. 

J 


Second Liberty loan, \ 


4i 


1918 


Redeemable on or after 
Nov. 15, 1927. 


1 


converted. / 


May, Nov. 








[Payable Nov. 15,1942. 


J 


Third Libertj' loan. . . 


...do... 


1918 


Payable Sept. 15,1928. 
[ Redeemable on or after 


Mar.,Sept. 


Fourth Liberty loan 


...do... 


1918 


\ Oct. 15, 1933. 
Payable Oct. 15, 1938. 
Redeemable June 15, 


Apr.,Oct. 


Victory Liberty loan . \ 


3|and4f 


1 1919 


• or Dec. 15, 1922. 


June, Dec. 


i 


f 


Payable May 20, 1923. 


1 


War-savings and ] 




1 1917- 
/ 1919 


/Payable Jan. 1, 1923, 


\ At 

/ maturity* 


thrift stamps, series \ 
1918-19. J 


43 


\ and Jan. 1, 1924. 
















f Redeemable after 1 


\ 








j year from date of 


Postal savings bonds \ 


22 


1911- 


issue. 


[ Jan., July 


(first to sixteenth j 


1919 


Payable 20 years from 


1 


series). 






[ date of issue. 


J 


Aggregate of in-. . 










terest-bearing debt. 











iThis amount represents receipts of the Treasurer of the United States on ac- 
count of principal of bonds of the Fourth Liberty loan to June 30. 

* This amount represents receipts of the Treasurer of the L'nited States on ac- 
count of principal of notes of the Victory- Libertj' loan to June 30 

• I. ?^^® average issue price of war-savings stamps for the years 1918 and 1919 
with interest at four per cent per annum compounded quarterly for the average 

490 



PUBLIC DEBT OF THE UNITED STATES 

June 30, 1919 





OUTSTANDING JUNE 30, 1919 


Amount issued 


Registered 


Coupon 


Total 


$646,250,150,00 


$598,031,100.00 


$1,692,950.00 


$599,724,050.00 


162,315,400.00 


105,036,250.00 


13.453,650.00 


118,489,900.00 


54,631,980.00 


48,948,080.00 


6,100.00 


48,954,180.00 


30,000,000.00 


25,835,520.00 


111,880.00 


25,947,400.00 


50,000,000.00 


43,389,600.00 


6,610,400.00 


50,000,000.00 


28,894,500.00 


6,705,000.00 


22,189,500.00 


28,894,500.00 


4,719,582,490.00 




3,446,260,490.00 


3,446,260,490.00 


178 723 000 00 


178,723,000.00 
288,862,500.00 




178,723,000 00 


1,989,455,550.00 


1,121,209,100.00 


1,410,071,600.00 


568,318,450.00 


21,062,950.00 


146,729,800.00 


167,792,750.00 


405,443,150.00 


86,588,100.00 


316,852,000.00 


403,440,100.00 


3,492,050.00 


1,112,700.00 


2,379,350.00 


3,492,050.00 


3,807,864,200.00 


85,942,950.00 


618,261,400.00 


704,204,350.00 


$3,034,609,850.00 


$444,421,350.00 


$2,417,830,900.00 


$2,862,252,250.00 


4,175,148,700.00 


530,720,350.00 


3,427,832,350.00 


3,958,552,700.00 


16,959,504,587.00 






6,794,504,587.00 


23,467,844,971.77 






3,467,844,971 77 


*1, 091, 017, 006. 20 




.. .953,997,434.77 


953,997,434.77 
11,349,960.00 


11,349,960.00 


10,676,000.00 


673,960.00 


$31,384,445,994.97 






$25 234 496 273 64 











period to maturity will amount to $5 on Jan. 1, 1923, and Jan. 1, 1924, respectively. 
Thrift stamps do not bear interest. 

*Thi8 amount represents receipts of the Treasurer of the United States on ac- 
count of proceeds of sale of war-savings certificate stamps and United btates tbfift 
stamps. 

491 



INDEX 



Acceptances, in Great Britain, 
30, 108; in United States, 
136, 139. 

Adams, Henry Carter, 7, 234, 
312, 315, 373, 391. 

Adjustments from peace to war, 
of the various belligerents, 
49-51; obstacles to, 51-53. 

Admissions and dues, taxes on, 
in United States, 481. 

Advances to Allies. See Loans, 
foreign. 

Africa, foreign investments in, 
16, 17 ; total war expenditures 
by, 105. 

Aldrich-Vreeland notes, 58. 

American Bankers ' Association, 
210. 

American Economic Associa- 
tion, Committee on War Fi- 
nance of, 219, 281, 356, 382. 

American Expeditionary Force, 
327. 

American Foreign Securities 
Company, 68-69, 75, 171. 

American Geographical and 
Statistical Society, 308. 

Amsterdam, displaced by Lon- 
don as commercial center, 18 ; 
exchange in, 125. 

Angell, Norman, 17. 

Anglo-French loan, 66, 68, 162, 
170, 396. 

Annuities, 386. 

Antwerp, sacking of, 18; stock 
exchange of, closed, 28. 

Argentina, a borrowing nation, 
12; foreign trade of, in 1913, 
15 ; British investments in, 
16; loans to, by United 
States, 65, 67 ; bonds of, as 
collateral, 69 ; exchange ar- 
rangements between United 
States and, 142; gold reserve 



in, 353 ; note issues in, 353 ; 
bank deposits in, 355. 

Armistice, 224, 225, 286. 

Australia, a borrowing country, 
12; British investments in, 
16; total war expenditures 
by, 105 ; direct issue of notes 
by, 130; straight-term bonds 
in, 149; bonds issued at par, 
152, 386; number of sub- 
scribers to loans in, 157; war 
loans in, 184 ; imports from, 
into United States, 331, 386. 

Austin, Oscar Phelps, 354. 

Austria, expenditures of, 104; 
lowest denomination of bonds 
in, 156; number of subscrib- 
ers to loans in, 157 ; loans by, 
1914-1918, 196; revenues of, 
1915-1918, 263; capital levy 
in, 380. 

Austria-Hungary, manufactures 
in, 3; German investments in, 
17; financial condition of, in 
1914, 26; ultimatum of, to 
Serbia, 27 ; declaration of 
war by, 28 ; effect upon, of 
declaration of war, 33, 50; 
moratorium in, 37; loss of 
gold by, 42 ; increase of note 
issues in, 47; expenditures by, 
102-104 ; national pre-war in- 
come of, 106; condition of 
Bank in, 19] 3-1 91 7, 123; in- 
flation in, 125 ) assistance to, 
by Bank, 126-128, 148; rate 
of interest unchanged by, 
151; pre-war credit of, 151; 
lowest denomination of bonds 
in, 156; loans by, 194-195; 
war taxation in, 262-263; 
budgets, 1915-1918, 318; 
gold reserves and note issues, 
352 ; distrust of paper money 



493 



INDEX 



in, 366; pre-war population, 
370; wealth, 370; income, 
370; total debt, 370; in- 
terest charge, 371; capital 
levy in, 379. 
Austro-Hungarian Bank, Im- 
perial, gold reserves of, 40, 
42, 123-124, 128, 352, 364; 
note issues of, 48, 123 ; run 
on, 122; condition of, 1913- 
1917, 123; deposits in, 123, 
124; loans by, 126-128. 

Bailey, W. W., 270. 

Balkans, German investments 
in, 17. 

Bank of Amsterdam, founding 
of, 6; gold reserves of, 353; 
note issues of, 353. 

Bank of Algeria, 175. 

Bank of England, establish- 
ment of, 6; head of credit 
system, 29; services of, upon 
outbreak of war, 31, 35, 108- 
110; suspension of Bank Act, 
39; gold reserves of, 40, 352, 
363 ; advances to Government, 
160, 162, 166; note issues of , 
352; deposits in, 355. 

Bank of Finland, gold reserve 
of, 352; note issues of, 352; 
resumption of specie pay- 
ments by, unlikely, 364. 

Bank of France, establishment 
of, 6; discount of pre-mora- 
torium bills of exchange, 37, 
111; gold reserves of, 40, 41, 
352, 363; note issues of, 45, 
112, 352; advances to the 
state, 112, 168, 169, 171, 172, 
389, 396; deposits in, 355; 
resumption of specie pay- 
ments by, unlikely, 364. 

Bank, Imperial, of Germany, 
gold reserves of, 23, 40, 352, 
363; note issues of, 23, 117, 
119-122, 352; loans of, upon 
outbreak of war, 38, 118; run 
on, 120; advances to govern- I 



ment, 187; tax on, 260; de- 
posits in, 355; resumption of 
specie payments by, unlikely, 
364. 

Bank of Hamburg, 6. 

Bank of Italy, note issues of, 
115, 352; advances to the 
government by, 183 ; gold re- 
serves of, 352, 363; deposits 
in, 355; resumption of specie 
payments by, unlikely, 364. 

Bank of Naples, 14. 

Bank of Ottawa, shipment of 
gold to, from IJnited States, 
49; for Bank of England, 57. 

Bank of Rumania, gold reserves 
of, 364. 

Bank of Sicily, 114. 

Bank of Sweden, founding of, 
6 ; gold reserves of, 353 ; 
note issues of, 353; deposits 
in, 355. 

Bank, Imperial, of Eussia, 
gold reserves of, 26, 40, 41, 
114, 352, 363; note issues of, 
46, 113, 352; advances to 
government by, 113, 176, 177; 
resumption of specie pay- 
ments by, unlikely, 364. 

Bank of Turkey. See Imperial 
Ottoman Bank. 

Bank of Venice, 6. 

Bank deposits, in leading coun- 
tries, 1913 and 1918, 355; in 
United States, 1913-1918, 
357; reduction of, unlikely, 
362. 

Bank notes, usual conditions of 
issue, 351 ; issued by bel- 
ligerents, 1914 and 1918, 352; 
by neutrals, 353 ; contraction 
of, will be slow, 362; begun 
in some countries, 365 ; 
limited circulation of, in Eu- 
rope, 366-367. 

Banking, functions of commer- 
cial, 5 ; deposit, 6 ; modern 
development of, 6; in 



494 



INDEX 



Florence, 6; problem of, dur- 
ing war, 107, 351. 

Bayley, N. A., 304. 

Beer. See Liquor, malt. 

Belgium, manufactures in, 3 ; 
a leading country, 12 ; for- 
eign trade of, in 1913, 15; 
foreign investments of, 17 ; 
entered by German troops, 
28; moratorium in, 37; total 
war expenditures by, 105 ; 
financial policy of war, 183 ; 
unable to pay war expendi- 
tures out of tax revenue, 
316; acceptance credit 
granted to, 341; investment- 
trusts in, 343. 

Berlin, stock exchange in, 
closed, 28; panic in, 33. 

Bimetallism, 145. 

Blaine, James G., 303. 

Block, Maurice, 83. 

Bogart, Ernest L., 103, 105, 
106, 219, 250, 265, 293, 298, 
325, 399, 417. 

Bohemia, 366. 

Bolivia, loans to, in United 
States, 67 ; exchange arrange- 
ments with, 142. 

Bolles, A. S., 298, 299, 300, 304. 

Bolshevik regime in Eussia, 181, 
253, 379. 

Bons de la defense nationale, 
in France, 168, 171, 172, 174. 

Bond-purchase fund, in United 
States, 218-220, 227, 389. 

Bonds, serial, 386; straight- 
term, 387; optional or re- 
deemable, 387;^ gold, 388. 
See also Loans, internal. 

Bordeaux, municipal bonds of, 
sold in United States, 70. 

Bourse, founding of, in Paris, 
6. 

Boy Scouts, 216. 

Brazil, British investments in, 
16. 

British Dominions, war expendi- 
tures by, 105; war bonds 



made taxable, 153 ; loan 
policy of, 183 ; issued straight- 
term bonds, 387. 

Brussels, stock exchange in, 
closed, 28. 

Budget, effect of war upon, in 
Great Britain, 89-90 ; in 
France, 93-94; in Eussia, 97, 
254; in Germany, 99; in Au- 
stria-Hungary, 103 ; first war, 
in Great Britain, 236; second, 
237; third, 238; fourth, 241; 
fifth, 243; in Germany, 259; 
summary of war, of leading 
belligerents, 317-318; since 
the armistice, 369; of 1920 
in Great Britain, 394; of 
1921, 395; of 1920 in France, 
396; of 1920 in Germany, 
402, 404. 

Budapest, stock exchange in, 
closed, 28 ; prices in, 125. 

Bulgaria, German investments 
in, 17; moratorium in, 37; 
total war expenditures by, 
105; war loans in, 195; war 
costs of, defrayed largely by 
Germany, 198; unable to pay 
war expenditures out of tax 
revenues, 316. 

Bullock, Charles J., 314. 

Business as usual, prevented 
speedy adjustment to war 
organization, 52-53, 214; 
taxes on, in France, 249; 
future of, 409. 

Canada a borrowing country, 
12; British investments in, 
14 ; foreign trade of, in 
1913, 15; loans to, by United 
States, 65, 67; bonds of, as 
collateral, 69; total war ex- 
penditures by, 105; direct 
issue of notes by, 129; limita- 
tion on amount of loans in, 
147; straight-term bonds in, 
149; issue of bonds at par, 
152, 386; lowest denomina- 



495 



INDEX 



tion of bond in, 156; war 
loans in, 184; government 
support of price of bonds, 
220; ban^ deposits in, 355; 
made bonds payable in gold, 
388. 

Capital, growth of, 25; demand 
for, 7 ; annual increase of, in 
United States, 77, 377; need 
of, 78 ; for reconstruction in 
Europe, 334-335; sources of 
available, 336; an available 
surplus in the United States, 
337; how to be loaned to Eu- 
rope, 338 ; investment by 
Americans in Germany, 345. 

Capital Issues Committee, of 
Federal Eeserve Board, 137, 
217, 225. 

Capital levy, proposed in Great 
Britain, 379; in France, 380; 
in Italy, 380, 400; in Switz- 
erland, 380; in Czecho-Slo- 
vakia, 380; in Austria, 380; 
in Hungary, 380 ; in Ger- 
many, 381, 403; definition of, 
381; arguments for, 382. 

Certificates of indebtedness, of 
foreign governments, 206, 
207, 230. See also Treasury 
bills; Treasury certificates of 
indebtedness. 

Ceylon, British investments in, 
16. 

Chamber of Commerce of New 
York, 308. 

Chamberlain, Austen, 166, 400. 

Chase, Salmon P., 297, 298, 302, 
303, 304, 305, 306, 307, 308, 
309, 310, 311, 312, 313, 314, 
316. 

Chicago, centralization of bank- 
ing in, 134; credit insurance 
in, 342. 

Child labor, tax on, in United 
States, 295, 488. 

Chile, a borrowing country, 
12; bonds of, as collateral, 
69. 



China, a borrowing country, 12 ; 
foreign trade of, in 1913, 15; 
loans to, by United States, 
65, 68. 

Civil War in United States, 
financing of, 297-315. 

Coal, government monopoly of, 
in Italy, 258; taxation of, in 
Germany, 260. " 

Collier, James W., 269. 

Commerce. See Trade, foreign. 

Constitutional budgetary pro- 
cedure, breakdown of, in 
Great Britain, 89-90; in 
France, 93; in Germany, 101; 
in Austria-Hungary, 103. 

Consumption taxes, 410. 

Contraction, the remedy for in- 
flation, 354, 361. 

Cooke, Jay, 311. 

Corporations, development of, 
2; income tax on, 267. 271, 
276, 288; excise tax on, 275; 
tax in Germany, 404. 

Cost of World War, 1, 105; of 
nineteenth century wars, 85; 
of World War to United 
States, 87-88; to Great Brit- 
ain, 90; to France, 90; to 
Eussia, 98; to Italy, 98; to 
Germany, 100-101; to Au- 
stria-Hungary, 103, 104; to 
all belligerents, 105; of war, 
character of, 413-420 ; who 
pays, 413; not altered by 
bond issues, 414 ; extent to 
which borne by future gen- 
erations, 415 ; indirect, to all 
belligerents, 417. 

Cotton pool in United States, 
57 ; buy a bale campaign, 58. 

Crammond, Edgar, 52, 85. 

Credit, conditions for the de- 
velopment of national; 1; of 
international, 10 ; organiza- 
tion of, in Great Britain, 29; 
breakdo-^Ti of, as result of 
war, 34, 55; machinery for 
financing foreign trade, 80; 



496 



INDEX 



use of, instruments in Ger- 
many, 120; needed by Eu- 
rope during period of recon- 
struction, 340; acceptance, to 
Belgium, 341 ; industrial, 
341; guaranteed by govern- 
ments, 342; granted by group 
export corporations, 342, 348; 
insurance, 342 ; interchange, 
system of National Associa- 
tion of Credit Men, 343; 
long term, 343; secured by 
first lien on government reve- 
nues, 347; short term, 348. 

Creditor nation, the United 
States, a, 76, 200, 330, 348. 

Crisp, Charles R., 270. 

Cuba, loans to, in United States, 
67. 

Culbertson, W. S., 11. 

Currency and Bank Note Act 
of August 6, 1914, in Great 
Britain, 43-44, 128. 

Customs duties, in Great Brit- 
ain, 239, 242, 244; in Eussia, 
250; in Italy. 257; in Ger- 
many, 262, 408; in United 
States, 269, 285, 295; during 
Civil War 302, 306; future 
of, 411. 

Czecho-Slovakia, difficulty of 
trade in, 366 ; capital levy in, 
380; reduction in interest 
suggested in, 383. 

DarlehensTcassen. See Loan offi- 
ces. 

Davison, Henry P., 341. 

Death duties. See Inheritance 
tax. 

Debt, public, as an investment, 
3 ; favoring conditions of, 7 ; 
growth of, 8; due to war, 
8-9 ; floating, in Germany, 
101, 194, 378; public, in Eus- 
sia, 178; in Italy, 182, 399; 
in Germany, 193 ; amount of, 
of the European belligerents, 
368-370; payment of, un- 



likely, 372; form of, 372; 
theory of perpetual, 373; as- 
sumed burdenlessness of do- 
mestic, 373; provision for 
payment of, in United States, 
375; funding the floating, 
375; of United States, 376; 
of Great Britain, 377; of 
Italy, 378; of Germany, 378; 
of Austria-Hungary, 379; 
form of, not adapted for pay- 
ment, 385; kinds of, 386-388; 
willingness of belligerent na- 
tions to pay, 388; ability to 
pay, 389-390; payment of, 
not a loss, 416; statement of, 
in United States, 489-491. 

Deficit, in United States, 393; 
in Great Britain, 394; in 
France, 396 ; in Italy, 400 ; in 
Germany, 402, 404. 

Deflation. See Contraction. 

Denmark, 353 ; bonds of, as col- 
lateral, 69 ; gold reserve in, 
353; note issues in, 353. 

Deposit banking, a development 
of nineteenth century, 6; in- 
creased during war, 355. 

Deterioration of race through 
war, 418. 

Dewey, Davis E., 314. 

Direct tax of ]861 in United 
States, 302, 307; taxes, 277, 
407. 

Dix, John A., 298. 

Dollar exchange, 336. 

Door and window tax, in 
France, 249. 

Edge Act, 344. 

Education of American investor 

needed, 345-346. 
Egypt, bonds of, as collateral, 

69. 
Embargo on gold, 39, 41, 141, 

365. 
Erzberger, Mathias, 402. 
Estate tax. See Inheritance 

tax. 



497 



INDEX 



Excess-profits tax in Great 
Britain, 239, 242, 243, 395, 
407, 409; in France, 246, 247, 
397,409; in Eussia, 251, 252; 
in Italy, 255, 256, 400, 409; 
in Germany, 259, 260, 261, 
403; in United States, 274, 
276, 280-282, 289-291, 407, 
409. 

Exchange, bills of, usually 
drawn on London, 19, 80; 
mechanism of foreign, in 
Great Britain, 29; movement 
of, after outbreak of vcar, 
48, 56, 64; efforts to provide, 
in Great Britain, 109; peg- 
ging of, 141, 142; fall of, an 
obstacle to foreign trade, 
336, 350; effect of inflation 
on, 359. 

Exchequer bonds in Great Brit- 
ain, 160, 162, 165. 

Excise duties, in Great Britain, 
239, 242, 395; in United 
States, 268, 275, 284, 285, 
292; during Civil War, 302, 
307, 308, 313; in France, 
397; in Germany, 408; de- 
velopment of, 410; rates of, 
in United States, 479, 482. 

Exemption from taxation, Lib- 
erty bonds, 208, 211-212, 215, 
222, 226-227, 279; minimum 
of, under British income tax, 
238; under French income 
tax, 248 ; under United States 
income tax, 266, 277, 279. 

Expenditures for World War, 
82-106; difficulties in esti- 
mating, 82; predictions as to, 
83 ; effect on, of technical 
efficiency, 84; by United 
States, 86-89 ; by Great Brit- 
ain, 89-93 ; extravagance of, 
92; by France, 93-97; by 
Eussia, 97-98; by Italy, 98; 
by Germany, 98-102; by Aus- 
tria-Hungary, 102-104; by 
all belligerents, 105; com- 



pared with national incomes, 
106; in United States since 
the armistice, 337, 392-393; 
extravagant plans for, in Eu- 
rope, 340; growth of, prob- 
able, 374; in Great Britain, 
393-395; in France, 396, 
397; in Italy, 399; in Ger- 
many, 402, 404 ; comparison 
of, for five nations, 405-407. 
Exports from United States, re- 
stricted to non-belligerent 
countries, 326; growth of 
during war, 327-329; value 
of, 328; destination, 328; 
future of, 331; by group ex- 
port corporations, 342; for 
1919, by months, 349. 

Federal Eeserve Act, 58, 80. 

Federal reserve banks, 135; re- 
discounting by, 135; as fiscal 
agents of the government. 
138-139, 206; preferential 
discounts by, 138 ; distributed 
Treasury certificates of in- 
debtedness, 139, 203; note 
issues of, 139, 352; gold re- 
serves of, 139, 140, 352, 363; 
discounts by, 139, 199; mar- 
keted Liberty loans, 206, 
209; holdings of war paper, 
213, 216-217, 224, 226; de- 
posits in, 355. See also Na- 
tional banking system. 

Federal Eeserve Board, 70, 135, 
323 ; capital issues committee 
of, 137, 217, 225; preferen- 
tial discounts, 138; division 
of foreign exchange, 142 ; in- 
ternational gold clearance 
fund, 144. 

Federal Eeserve System, 132- 
140; centralization of re- 
serves in, 135; asset currency, 
136; gold settlement fund, 
136; assistance in conduct of 
war, 137. 



498 



INDEX 



Ferdinand, Archduke Franz, 
assassination of, 24, 27. 

Fessenden, W. P., 314. 

Fordney, Joseph W., 88. 

Foreign Finance Corporation, 
345. 

Foreign Trade Corporation, 
342. 

Foreign trade. See Trade, for- 
eign. 

France, value of manufac- 
tures in, 3 ; value of property 
in, 5; a lending nation, 12; 
foreign trade of, in 1913, 15 ; 
foreign investments of, 16, 
18, 25, 399; financial unpre- 
paredness of, 25 ; pre-war 
loan of, 25; breakdown of 
credit in, 31-32; moratorium 
in, 36; methods to protect 
gold reserves, 41, 140; in- 
crease in note issues in, 45; 
effect of war upon, 50 ; loans 
to, in United States, 1915- 
1917, 67; mobilizes Ameri- 
can securities, 74; war ex- 
penditures published by, 82 ; 
suspension of constitutional 
methods in, 93 ; credits voted 
in, 1914-1918, 94; expendi- 
tures by, 1914-1918, _ 95; 
classification of, 96; national 
pre-war income of, 106 ; utili- 
zation of services of Bank of 
France, 110-113, 148; limita- 
tion on amount of loan in, 
147; short-term notes in, 148; 
issue of perpetual loans by, 
149; pre-Avar credit of, 151; 
bonds issued below par, 152; 
pre-war debt converted by, 
153 ; bond-purchase fund in, 
154 ; loans to Allies by, 155 ; 
lowest denomination of bonds 
in, 156; number of sub- 
scribers to loans in, 157 ; 
loans by, 168-175; in 1914, 
169; in 1915, 170; in 1916, 
172; in 1917, 173; in 1919, 



175; war taxation of, 245- 
250; revenues of, 1914-1918, 
250; budgets of, 1914-1918, 
317; financial situation in, 
369, 396, 405; pre-war popu- 
lation of, 370; wealth, 370; 
income, 370; total debt, 370; 
interest charge, 371; floating 
debt in, 377; capital levy in, 
380; taxes in, 396-398, 406, 
408; tobacco monopoly in, 
411; moratorium decrees of, 
429-431. 

Frederick, Leopold, 81. 

Frederick the Great, 22. 

Friday, David, 77. 

Funding. See Debt. 

Gerard, James W., 40. 

Germany, value of manufac- 
tures in, 3 ; a lending nation, 
12; foreign trade of, in 1913, 
15 ; foreign investments of, 
16, 17 ; ultimatum of, to 
France, 28 ; financial prepa- 
ration for war, 33, 50; avoids 
a moratorium, 37; measures 
in, to safeguard gold reserves, 
40; exchange of gold for 
notes in, 41, 140; currency 
measures in, 47; lean to, in 
United States, 67; mobilizes 
foreign securities, 75 ; ex- 
penditures by, 1914-1918, 99, 
100; votes of credit, 1914- 
1918, 100; national pre-war 
income of, 106; assistance to, 
by banks, 115-122 ; note cir- 
culation in, 1914-1918, 119; 
inflation in, 120-122, 360; 
direct issue of notes by, 131 ; 
use of Treasury bills by, 148 ; 
issue of perpetual loans by, 
149; date of issue, 150; rate 
of interest unchanged by, 
151; pre-war credit of, 151; 
bond purchases by, 154; loans 
to Allies, 155 ; lowest denomi- 
nation of bonds, 156; num- 



499 



INDEX 



ber of subscribers to loans, 
157; loans by, 183-194; in 
1914-1918, 188, 194; finan- 
cial policy of, 234, 258; war 
taxation in, 259-262; reve- 
nues of, 1915-1919, 262; 
budgets of, 1915-1919, 318; 
financial situation in, 369, 
402-405; pre-war population, 
370; wealth, 370; income, 
370; total debt, 370, 378; in- 
terest charge, 371 ; floating 
debt in, 378; capital levy in, 
381; reparations by, 385; 
ta^es in, 402-404, 406, 408; 
act providing for loan offices 
in, 432-436. 

Glass, Carter, 88, 392, 393. 

Gold, withdrawal of, from 
banks in England, 31, 43 ; in 
Germany, 33 ; export forbid- 
den in France, 41 ; in United 
States, 49, 141, 142, 365; in 
other countries, 141, 365; 
hoarding of, in England, 43 ; 
in France, 46 ; export of, 
from United States, 49, 56, 
63, 142, 143, 365; pool in 
United States, 57; imports 
into United States, 64-65, 68. 
141, 143; settlement fund 
under Federal Eeserve Sys- 
tem, 136; international clear- 
ance fund, 143 ; fall in price 
of, 144-145; production of, 
145, 364; statistics of, 365. 

Gold reserves, methods of safe- 
guarding, 38; in principal 
central banks, 39, 140 ; 
increased by exchange of 
gold for bank notes by 
citizens, in Germany, 40- 
41; in France, 41, 363; 
in Eussia, 41, 363; of 
Reichsbank, 122, 363 ; against 
currency notes in Great Brit- 
ain, 129; against Dominion 
notes in Canada, 129; against 
Commonwealth notes in Aus- 



tralia, 130; in United States, 
139, 140, 363; essential for 
support of credit, 143 ; of 
banks during Civil War, 305; 
of belligerents, 1914 and 
1918, 352, 354; of neutrals, 
353, 354; of leading banks 
in 1919, 363. 
Great Britain, value of manu- 
factures in, 3 ; value of prop- 
erty in, 5; a lending nation, 
12; foreign investments of, 
14, 16, 18, 24; foreign trade 
of, in 1913, 15; unprepared- 
ness of, for war, 24; declares 
war on Germany, 28 ; break- 
down of credit in, 29-30, 50; 
moratorium in, 35 ; currency 
measures in, 43 ; borroAvings 
by, in United States, 1915- 
1917, 67; mobilizes American 
securities, 74; war expendi- 
tures published by, 82 ; ap- 
propriation system of, 89; 
expenditures of, 1914-1919, 
90; by quarters, 91; extrava- 
gance in, 92; total war ex- 
penditures by, 105 ; national 
pre-war income of, 106, 370; 
use of paper money and bank 
credit by, 108-110; direct 
issue of notes by, 128; Treas- 
ury bills in, 148 ; continuous 
loan in, 149 ; pre-war credit 
of, 151 ; bonds issued at par, 
152, 386 ; pre-war debt con- 
verted, 153 ; war bonds made 
taxable in, 153 ; bond pur- 
chase fund in. 154; loans to 
Allies by, 155 ; lowest de- 
nomination of bonds in, 156; 
number of subscribers to 
loans in, 157; loans by, 159- 
167; in 1915. 160; in 1916, 
162; in 1917, 163; in 1918, 
165; in 1919, 167; tax 
policy of, 234, 235 ; war taxes 
in, 235-245 ; revenues of, 
1914-1919, 245; budgets of, 



500 



INDEX 



1915-1919, 317; proportion 
of loans and taxes, 319; 
placed embargo on gold ex- 
ports, 365 ; financial situation 
in, 369, 394, 405; pre-war 
population of, 370; wealth, 
370; total debt, 371; interest 
charge, 371; floating debt in, 
377; capital levy in, 379; re- 
duction in debt of, 390 ; taxes 
in, 395, 406, 407; moratorium 
proclamations in, 423-428. 

Greece, French loans to, 25 ; 
total war expenditures by, 
105. 

Guyot, Ives, 16. 

Hart, A. B., 305, 310. 

Havenstein, Rudolph, 120, 193. 

Hay, John, 299. 

Helfferich, Karl, 99, 183, 186, 
189, 191, 234, 258, 259. 

Hill, Ebenezer J., 271. 

Hirst, F. W., 85, 151. 

Hoarding of money, in Eng- 
land, 43 ; in France, 46 ; in 
Germany, 47, 120; in Austria- 
Hungary, 48, 123. 

Hobson, C. K., 14, 16. 

Holland, a lending country, 12; 
foreign trade of, in 1913, 15 ; 
bonds of, as collateral, 69; 
sale of foreign securities in, 
75 ; French loans in, 171 ; 
gold reserves in, 353 ; capital 
levy in, 379. 

Hollander, Jacob H., 205. 

Hoover, Herbert C, on needs of 
Europe, 338-339. 

Howe, Frederick C, 313. 

Hull, Cordell, 265. 

Hungary, expenditures of, 104; 
lowest denomination of bonds, 
156; number of subscribers 
to loans, 157; war loans, 
1914-1918, 196; revenues of, 
1915-1918, 263; capital levy 
in, 380. 

Hyndman, H. M., 26. 



Imperial Ottoman Bank, de- 
cline of gold reserves of, 42, 
364. 

Imports into United States, of 
non-essentials curtailed, 326; 
growth of, during war, 327, 
329-330; sources, 329; future 
of, 331, 332, 348; for 1919, 
by months, 349; restrictions 
upon, by Europe, 350. 

Income, national, of principal 
belligerents, 106, 370; 'per 
capita, 371. 

Income tax, in Great Britain, 
236, 237, 242, 395, 407; in 
France, 246, 248, 250, 397, 
398, 408; in Eussia, 252; in 
Italy, 255, 257, 258, 400, 
408; in Germany, 261, 403, 
408 ; in Austria-Hungary, 
263; in United States, 264- 
267, 271-273, 277-280, 287- 
289, 407; during Civil War, 
302; statistics of, 1913-1917, 
267, 473 ; personal returns of, 
474; rates of, act of 1913, 
475; act of 1916, 475; act of 
1917, 476; act of 1919, 476. 

Indemnity bonds, German, soon 
to be issued, 367; probable 
transfer of, 384; amount 
fixed by Treaty of Peace, 
385; payment of, 397. 

Independent Treasury Act of 
1846, 304. 

India, a borrowing country, 12 ; 
foreign trade of, in 1913, 15 ; 
British investments in, 16; 
total war expenditure by, 
105; exchange arrangements 
, between United States and, 
142; issue of bonds at par, 
152 ; number of subscribers 
to loans, 157; war loans in, 
185; imports into United 
States from, 331. 

Inflation, in Germany, 120-122; 
in A u s t r i a-Hungary, 124- 
126; effect on trade of, 126; 



501 



INDEX 



in United States, 139, 200, 
205, 323, 324; during Civil 
War, 313 ; must be avoided 
in extending credit to Eu- 
rope, 347; a "U'orld phenome- 
non, 351; since the armistice, 
354, 355; definition of, 356; 
effects of, upon prices, 356- 
358; upon wages, 356, 359; 
upon foreign exchange, 359; 
upon solvency of banks, 359 ; 
why permitted, 359; aided 
flotation of loans, 360; cur- 
tailed consumption of non- 
essentials, 360; evil effects of, 
upon the Treasury, 361; 
social cost of, 361; remedy 
for, 361; effect of new credits 
on, 367; persistence of, 368. 

Inheritance tax, in Great Brit- 
ain, 236, 407; in Germany, 
261, 403, 409; in Austria- 
Hungary, 262 ; in United 
States, 273-274, 276, 283, 291, 
407; in France, 397; in Italy, 
401 ; use in post-war finance, 
409; rates of, in United 
States, 478. 

Insurance, rates of marine, 51 ; 
Bureau of War Eisk, in 
United States, 58; taxation 
of, in United States, 481. 

Intelligence of peoples in prin- 
cipal countries, 391-392. 

Inter-Allied Purchasing Com- 
mission, 207, 232. 

Interest charges on the public 
debt, of leading European 
belligerents, 369; per capita, 
371; proposal to reduce, 383; 
on Allied debt postponed by 
United States Treasury De- 
partment, 384; of French 
debt, 396 ; German debt^ 402, 
404. 

International Cotton Corpo- 
ration, 342. 

International High Commis- 
sion, 144; proposes interna- 



tional gold clearance fund, 
144. 

Internationalism of trade, 20, 
27. 

Investment in undeveloped 
countries, 10-12; as a cause 
of war, 11, 12; effected by 
trade, 13, 15 ; of foreign capi- 
tal in United States, 13; 
British, abroad, 14-16, 24; 
of French, 16-17, 25, 399 ; of 
German, 16-17; of Belgian, 
17; of Dutch, 17; of Swiss, 
17; widespread character of, 
17; effect on international al- 
liances of, 17-18; slight, by 
people of United States be- 
fore the war, Qd ; during the 
war, 66-71, 346; larger 
profits from, at home, 81; 
permanent, in Europe called 
for by present situation, 343, 
346; of American capital in 
Germany, 345; in foreign se- 
curities, 346. 

Investment-trust, 343. 

Italy, value of manufactures in, 
3 ; German investments in, 
17; refuses to make war in 
1913, 23; moratorium in, 37; 
loans to, in United States, 
1915-1917, 67; war expend- 
itures published by, 82; ex- 
penditures by, 98, 106; na- 
tional pre-war income of, 
106; note circulation in, 1913- 
1918, 115; direct issue of 
notes by, 131 ; limitation on 
amount of loan in, 147 ; ad- 
vances of banks to, 148; is- 
sue of perpetual loans by, 
149 ; pre-war credit of, 151 ; 
lowest denomination of bonds 
in, 156; number of subscrib- 
ers to loans in, 157; loans in, 
181; debt in, 1914-1918, 182; 
loans, 1914-1918, 183; war 
taxation in, 254-258 ; rev- 
enues of, 1915-1919, 258; 



502 



INDEX 



budgets of, 1915-1919, 318; 
financial situation in, 3G9, 
399-401 ; pre-war population 
of, 370; "wealth, 370; income, 
370; total debt, 370; interest 
charge. 371; capital levy in, 
380; taxes in, 400, 406, 408. 

Japan, a borrowing country, 
12; foreign trade of, in 1913, 
15 ; loans to, in United 
States, 68; total war ex- 
penditures by, 105 ; loans to 
Allies by, 155 ; gold reserves 
in, 352; note issues in, 352; 
bank deposits in, 355. 

Jastrow, J,, 381. 

Java, imports from, 331. 

Jennings. H. H., 128. 

Jeze, Gaston, 249. 

Johnson, A. S., 111. 

Jordan, David Starr, 418. 

Jugo-Slavia, difficulties of ex- 
change in, 367. 

Kahn, Otto H., 211. 
Keating, Edward, 270. 
Kellogg, Vernon L., 418. 
Kemmerer, Edwin W., 132. 
Kent, F. I., 350. 
Kenyon, William S., 384. 
Kerensky, Alexander F., 253. 
Keynes, John Maynard, 384. 
Kinley, David, 311. 
Kitchin, Claude, 202, 286. 
Klotz, Louis, 380, 396. 

Laughlin, J. Laurence, 30, 47, 
429, 432. 

Law, Andrew Bonar, 243. 

League of Nations, 420. 

Lefifingwell, Eussell C, 376. 

Lenin, Nicholai, 253. 

Liberty loans in United States, 
199-233 ; marketed by banks, 
138, 206; policy rep^arding, 
201-202; characteristics of, 
207; first, 208-210; second, 
210-214; third, 214-220; 



fourth, 220-225; fifth, 226- 
228; Bond Act, first, 437- 
441; second, 442-454; sup- 
plement to, 454-457; third, 
457-463; fourth, 463-464; 
Victory Loan Act, 464-472. 

Lindsay, Samuel McC, 89. 

Liquor, distilled, taxation of, in 
Great Britain, 240, 244, 395; 
in France, 247, 397; in Eus- 
sia, 251; in Italy, 255, 258; 
in Germany, 261 ; in United 
States, 284, 292, 294 ; during 
Civil War, 307; future of, 
410; rates of, in United 
States, 479, 486. 

Liquor, malt, taxation of, in 
Great Britain, 237, 240, 244, 
395; in Eussia, 251; in Italy, 
255; in United States, 284; 
in France, 397; future of, 
410; rates of, in United 
States, 479, 486. 

Lloyd-George, David, 19, 35, 
236, 237, 419. 

Loan offices in Germany, 38, 
47, 116, 189; act providing 
for, 432-436. 

Loans, internal, of World War 
in Europe, 146-198 ; mag- 
nitude, 146; limitation of 
amount, 147; term, 148, 372; 
maturing and perpetual 
bonds, 149; period of sub- 
scription, 149; date of issue, 
150; rate of interest, 150; 
before the war, 151 ; price of 
issue, 152; conversion privi- 
leges, 153 ; exemption from 
taxation, 153 ; collateral 
privileges, 153 ; bond-pur- 
chase funds, 154; internal or 
foreign, 154 ; methods of sub- 
scription and payment, 155 ; 
low denomination of bonds, 
156; distribution and num- 
ber of subscribers, 156-158; 
success, 158 ; war loans in 
Great Britain, 160-167; first. 



503 



INDEX 



160; second, 161; third, 162- 
164; day-to-day borrowing, 
164-166; fourth, 166; war 
loans in France, 168-175; 
pre-war loan, 168; first, 170; 
second, 171; third, 173; 
fourth, 174; war loans in 
Eussia, 176-181; first, 176; 
second, 177; third, 177; 
fourth, 178 ; fifth, 179 ; sixth, 
179; seventh, 180; Liberty 
loan, 180 ; war loans in Italy, 
181-183 ; mobilization loan, 
181; first to fourth, 183; war 
loans in Canada, 184; in 
Australia, 184; in New Zea- 
land, 185 ; in India, 185 ; war 
loans in Germany, 183, 186- 
194 ; theory of war finance in, 
186, 190, 316; first loan, 187, 
189; second to eighth, 188; 
sale of bonds at nearly par, 
192; ninth, 193; war loans in 
Austria -Hungary, 194-197 ; 
in Turkey, 195, 198; in Bul- 
garia, 195, 198; in United 
States, 199-233 ; during Civil 
War, 299, 303, 309, 313; 
policy of financing war by, 
300, 307, 310, 312, 314. 

Loans, foreign, by people of 
United States during the war, 
66-71, 200; based on collat- 
eral, 69, 75; warning of Fed- 
eral Eeserve Board regard- 
ing, 70; by United States 
Government, to Great Britain, 
164; to France, 173, 174; 
to Eussia, 180; to Italy, ]82; 
to Allies, 206, 208, 230-233, 
319, 333; discontinued, 338; 
needed by Europe for recon- 
struction, 333-335; to Europe 
should be from private 
sources, 338; rationing of, 
339; demand for, 340; pro- 
posal to cancel United States, 
383. 

Loans, proportion between, and 



taxes, 319-325; advantages 
of loans, 320; objections to 
heavy taxation, 321; desir- 
ability of heavy taxes, 322; 
evils of excessive loans, 323- 
325. 

London, founding of stock ex- 
change in, 6 ; closing of, 28 ; 
as a world center, 18-20, 29, 
55; advantages of, 80; credit 
insurance in, 342. 

Loree, L. F., 73. 

Loria, Achille, 380. 

Luxuries, taxation of, in Great 
Britain, 240, 241, 242, 244, 
410 ; in France, 250, 398, 410 ; 
in Italy, 256, 401; in Ger- 
many, 261 ; in United States, 
285, 293-294, 4]0, 483. 

Lyons, municipal bonds of, sold 
in United States, 70. 

McAdoo, William G., 202. 
McCulloch, Hugh, 299, 300, 309, 

314. 
McKenna, Eeginald, 161, 238, 

241, 242. 

Madrid, stock exchange in, 
closed, 28. 

Manufactures, value of, in 
principal countries, 3. 

Marseilles, municipal bonds of, 
sold in United States, 70. 

Mexico, a borroAving country, 
12; French investments in, 
17, 399; loans to, in United 
States, 67. 

Mill, John Stuart, 418. 

Miller, Adolph C, 323. 

Mitchell, Wesley C, 306. 

Mobilization, of securities by 
British Government, 74; by 
French, 74; by German, 75; 
of financial resources of bel- 
ligerents, 158. 

Money, issue of, at outbreak of 
war, 42 ; paper money issued 
directly by British govern- 



504 



INDEX 



ment, 43-45, 128; by cham- 
bers of commerce in France, 
46; paper, and bank credit, 
107-145 ; Dominion notes is- 
sued by Canada, 129; Com- 
monwealth notes issued by 
Australia, 130; state notes in 
Italy, 131, 183 ; United States 
notes during Civil War, 308, 
309, 310, 311, 313, 314; in 
circulation in United States, 
1913-1918, 357; fiduciary, 
now in circulation, practically 
inconvertible, 358; reduction 
in total amount of, unlikely, 
362; a beginning made in, 
365 ; limited circulation of 
fiduciary, due to distrust, 
366-367. 

Monopolies, Government, rev- 
enue from, in Great Britain, 
240, 244; in France, 247, 
397; in Eussia, 251; in Italy, 
255, 257, 258; in Germany, 
259 ; future of, 411. 

Montreal, stock exchange in, 
closed, 28. 

Moratorium, definition of, 34; 
in Great Britain, 35-36; in 
France, 36; in Eussia, 37; 
in other countries, 37; in 
Germany, 37-38, 118; in. 
Austria-Hungary, 122 ; Brit- 
ish Proclamation of, August 
2, 1914, 423; of August 6, 
1914, 423; of August 12, 
1914, 425; of September 3, 
]914, 425; of September 30, 
1914, 426; French Mora- 
torium Decree, of August 9, 
1914, 429; of September 27, 
1914, 431. 

Morgan, J. P., and Company, 
69, 70, 341. 

Morocco episode, 21. 

Mulhall, M. G., 3. 

Munitions tax, in Great Britain, 
243; in United States 274, 
488. 



505 



National Association of Credit 
Men, 342. 

National banking system in 
United States, 132; decen- 
tralization, 133 ; inelasticity 
of note circulation, 133; cum- 
bersome exchange methods, 
134; lack of correlation, 134; 
act passed, 311. See also 
Federal Eeserve banks. 

Netherlands. See Holland. 

Newfoundland, loans to, in 
United States, 67. 

New York, founding of stock 
exchange in, 6; closing of, 
28; debt owed by, in 1914, 
55; as a world financial 
center, 76; conditions to be 
met, 77-81; centralization of 
banking in, 134; credit in- 
surance in, 342. 

New Zealand, total war ex- 
penditures by, 105; issue of 
bonds at par, 152, 386; num- 
ber of subscribers to loans 
in, 157; war loans in, 185. 

Nicholay, John G., 299. 

Nitti, S., 399. 

Norway, loans to, in United 
States, 67 ; bonds of, as col- 
lateral, 69 ; gold reserve in, 
353 ; note issues in, 353. 

Noyes, Alexander Dana, 24, 
297. 

Ohligations de la defense na- 
iionale, in France, 169, 172, 
174. 

Owen, Eobert L., 344. 

Paish, Sir George, 13, 14, 91 
384. 

Panama, loans to, in United 
States, 67. 

Panic, of July, 1914, on stock 
exchanges, 28-29; in Great 
Britain, 30-31 ; in France, 
31-32; in Germany, 33, 121; 



INDEX 



in United States, 54; in Aus- 
tria-Hungary, 1918, 126. 

Paper money. See Money. 

Paris, founding of Bourse in, 
6; closing of Coulisse, 28; 
municipal bonds of, sold in 
United States. 70. 

Peace Treaty, 396, 404. 

Peru, loans to, in United 
States, 67; exchange arrange- 
ments ^vith, 142. 

Pethick-Lawrence, F. W., 382. 

Petrograd, stock exchange in, 
closed, 28. 

Pigou, A. C, 321, 382. 

Plehn, Carl C, 8. 

Poland, exchange difficulties in, 
366. 

Population, of leading nations, 
370. 

Prices, movement of, in United 
States, 1913-1918, 357; 
causes of high, 357-358; con- 
tinuance of, 368. 

Progressive taxation, 409. See 
also Excess profits tax; In- 
come tax; Inheritance tax. 

Prohibition in United States, 
410. 

Public utilities, taxation of, in 
United States, 481. 

Easin, Dr., 383. 

Eeconstruction of Europe, 
amount needed for, 333-334; 
must be supplied by loans, 
335; sources from "which 
available, 336-337; how to 
be made available, 338; must 
be largely by own efforts, 
340; must be treated as a 
whole, 347. 

Beichishanl'. See Bank, Im- 
perial, of Germany. 

Reparations, 385. 

Repudiation of debt in Eussia, 
379 ; in Hungary, 379. 

Eesources of leading belliger- 
ents, 391-392. 



Eevenue act, in United States, 
of October 3, 1913, 264; of 
October 22, 1914, 263; of 
September 8, 1916, 269-275 
of March 3, 1917, 275-276 
of October 3, 1917, 277-285 
of February 24, 1919, 286 
rates of all acts, 479-488. 

Eevenues, of leading European 
belligerents, 369, 405; of 
United States, 392-393; of 
Great Britain, 394-395; of 
France, 396, 397; of Ger- 
many, 402, 404. 

Eibot, Alexandre F., 93, 249, 
380, 396, 398. 

Eoedern, Count S. F. W. E. von, 
261. 

Eumania, French investments in, 
17, 399; German investments 
in, 17; total war expendi- 
tures by, 105; financing the 
war in, 183. 

Eussia, value of manufactures 
in, 3 ; foreign trade of, in 
1913, 15; French investments 
in, 16, 18, 25, 399; fiscal con- 
dition in, in 1914, 26 ; cereal 
crops of, 1910-1914, 26, 32; 
mobilization by, 28 ; effect of 
outbreak of war upon, 32-33, 
50 ; moratorium in, 37 ; ex- 
change of gold for notes in, 
41, 140; increase of note 
issues in, 46; loans to. in 
United States, 1915-1917, 
67; expenditures by, 1914- 
1917, 97, 98; national pre- 
war income of, 106, 370; use 
of Bank, 113-114, 148 ; pre- 
war credit of, 151; lowest 
denomination of bonds in, 
156; number of subscribers 
to loans in, 157; loans in, 
176-181; in 1914, 177; in 
1915, 179; in 1916, 180, in 
1917, 181 ; revolution in, 180, 
252; Bolshevik regime, 181, 
253; war taxation in, 250- 



\^ 



506 



INDEX 



254; revenues of, 1914-1917, 
254; budgets of, 1914-1917, 
317; financial situation in, 
369; pre-Avar population, 370; 
wealth, 370; total debt, 370; 
interest charge, 370; alcohol 
monopoly in, 411. 

St. Louis, centralization of 
banking in, 134. 

Sales, tax on, in Germany, 259. 
See also Turnover, tax on. 

Santo Domingo, loans to, in 
United States, 67. 

Samuels, Herbert, 92, 

Savings of American people, 
77-78, 337. 

Schanzer, Carlo, 380. 

Schiffer, E., 100, 101, 262, 402. 

Schuckers, J. W., 299. 

Scotland, investment-trusts in, 
343. 

Securities, market for, 4; 
American, held abroad, 71, 
73; resold to United States, 
72-74; mobilization of, by 
British government, 74; by 
French, 74; by German, 75. 

Seligman, E. E. A., 12, 84. 

Serbia, French investments in, 
25; ultimatum to, by Austria- 
Hungary, 27; war declared 
against, 28; total war ex- 
penditures by, 105; financing 
the war in, 183. 

Sherman, John, 299. 

Silver, in German war chest, 
23 ; payment of, by Eeichs- 
bank, 47 ; exports of, from 
United States,, 142; rise in 
price of, 145. 

Simmons, F. McL., 265, 287. 

Sinking fund, of Fifth Liberty 
Bond Act, 227, 375, 389; in 
Great Britain, 389. 

Sixteenth Amendment of the 
Federal Constitution, 264. 

Smith, George Otis, 22. 

South America, closing of stock 



exchanges in, 28; foreign 
trade of United States with, 
62. 

Soviet. See Bolshevik. 

Spain, manufactures in, 3; 
bonds of, as collateral, 69; 
exchange arrangements be- 
tween United States and, 
142; gold reserve in, 353; 
note issues in, 
posits in, 355. 

Specie payments suspended, in 
Austria-Hungary, 34, 48, 
122; by Bank of France, 39, 
46; by Eeichsbank, 39, 47; 
by Bank of Eussia, 39, 46, 
113; by Imperial Austro- 
Hungarian Bank, 39; nomi- 
nally maintained by Bank of 
England, 39, 140; in Aus- 
tralia, 130; maintained in 
United States, 140 ; suspended 
during Civil War, 306; re- 
sumption of, unlikely in 
Europe, 362. 

Stamp taxes in United States, 
485. 

Stock exchange, modern de- 
velopment of, 6; establish- 
ment of, in London, 6; in 
New York, 6; in Paris, 6; 
panic on, in 1914, 27-29; 
closed in European cities, 
28; in New York, 28, 54. 

Straits Settlements, imports 
from, 331. 

Sugar, taxation of, in Great 
Britain, 239, 242; in Eussia, 
251, 252; in Italy, 255, 258; 
in United States during Civil 
War, 302, 307; in France, 
397; future, in United States, 
410. 

Super- and surtax. See Income 
tax. 

Sweden, bonds of, as collateral, 
69. 

Switzerland, a lending country, 
12; foreign investments of, 



507 



INDEX 



17; loans to, in United 
States, 67 ; bonds of, as col- 
lateral, 69 ; exchange arrange- 
ments between United States 
and, 142; gold reserve in, 
353 ; note issues in, 353 ; 
bank deposits in, 355 ; capital 
levy in, 380; salt monopoly 
in. 411. 



Taxation, in Europe, 234- 
264; in Great Britain, 235- 
245; in France, 245-250; in 
Eussia, 250-254; in Italy, 
254-258; in Germany, 258- 
262 ; in Austria-Hungary, 
262-263; in United States, 
264-296; during Civil War, 
301; objections to heavy, 
321; desirability of heavy, 
322; after-war problems of, 
391-412; in Great Britain, 
395; in France, 397; in Italy, 
400-401; in Germany, 402- 
404 ; probable development 
of, 407-412; direct, 407- 
409; of inheritances, 409; 
on business, 409; of articles 
of consumption, 410 ; customs, 
411; by fiscal monopolies, 
411. See also Eevenue acts. 

Tea, taxation of, in Great 
Britain, 236, 237, 239; in 
France, 247; in Italy, 258; 
in United States during Civil 
War, 302, 307; in the future, 
410. 

Thrift stamps, in United States, 
229. See also War savings 
certificates. 

Tobacco, taxation of, in Great 
Britain, 239, 243, 395; in 
France, 247, 397; in Eussia, 
251 ; in Italy, 257 ; in United 
States, 268, 275, 291, 294; 
during Civil War, 307 ; future 
of, 410; rates of, in United 
States, 480, 486-487. 



Toronto, stock exchange in, 
closed, 28. 

Trade, foreign, of principal 
lending and borrowing coun- 
tries, 15; of United States, 
59, 72; effect of war upon, 
60-62; with Europe, 60-61; 
with South America, 62-63; 
regulated to help win war, 
326-327; with Europe deter- 
mined by reconstruction 
needs, 336. See also Ex- 
ports; Imports. 

Trade balance of United States, 
13, 61, 64, 71, 72, 330, 349; 
of Great Britain, 25; of 
France, 25; result of self- 
denial, 332; will be paid by 
larger imports, 332. 

Treasury bills, in Great Britain, 
bought by the banks, 110, 
159; in Eussia, 113-114; use 
of, in World War, 148 ; emis- 
sions of, in Great Britain, 
160; in France, 168, 170; in 
Eussia, 176, 179; in Italy, 
181; in Germany, 187, 189, 
192. See also Certificates of 
indebtedness. 

Treasury certificates of indebt- 
edness, of United States, 139, 
202-205, 208. 

Treasury notes. Imperial, in 
Germany, 22, 23, 131-132; 
in United States during Civil 
War, 298, 299, 303, 304. 

Turkey, foreign trade of, in 
1913, 15; French investments 
in, 17, 18, 25, 399; mora- 
torium in, 37; loss of gold 
by, 42; total war expendi- 
tures by, 105; war loans in, 
195. 

Turnover, tax on, in France, 
249, 398. 

Ukraine, exchange difficulties 

in, 367. 
Underwood, Oscar W., 265. 



508 



INDEX 



United States, value of manu- 
factures in, 3 ; value of prop- 
erty in, 5; a borrowing na- 
tion, 12; foreign investments 
in, 13; foreign trade of, in 
1913, 15; exports of gold 
from, 49, 56, 143, 365; as a 
neutral, 54-81 ; debts owed 
by, 56; expansion of foreign 
trade, 59-63, 327-334, 349; 
imports of gold into, 63-65, 
68, 141, 143; foreign loans 
floated in, 1915-1917, 65-71; 
annual payments owed by, 
64, 71; exports and in^ports, 
1910-1914, 72; repurchase 
by, of American securities, 
73 ; financial position of, in 
1916, 76; new securities is- 
sued in, 1910-1916, 78; as a 
lender of capital, 76-81; war 
expenditures published by, 
82; monthly expenditures by, 
1917-1918, 86; total, 1916- 
1919, 87; total war expendi- 
tures by, 105; national bank- 
ing system in, 132-134; 
establishment of Federal Ee- 
serve System, 135; services 
to Government of, 136-140; 
as fiscal agents, 138-139; in- 
flation in, 139-140, 200, 356- 
357, 361; control of gold ex- 
ports by, 141; exports of 
silver from, 142; largest loan 
in, 147 ; limitations on amount 
of loans in, 147; use of 
Treasury bills by, 148 ; bonds 
issued at par, 152, 207, 386; 
war bonds made taxable, 153 ; 
bond purchase fund in, 154, 
218; loans to Allies by, 155, 
206, 230-233, 333; lowest de- 
nomination of bonds in, 156, 
207; number of subscribers 
to loans in, 157; loans in, 
199-233 ; war finance pro- 
gram, 201 ; issue of certifi- 
cates of indebtedness by, 204; 



First Liberty Loan of, 208- 
210; Second, 210-213; Third, 
214-219; Fourth, 220-224; 
Fifth, 226-228; sinking fund 
of, 227, 389; war savings 
certificates, 228-230; taxation 
in, 264-296 ; income tax, 264- 
267; act of October 22, 1914, 
268; of September 8, 1916, 
269-275; of March 3, 1917, 
275; of October 3, 1917, 277- 
285; of February 24, 1919, 
286-296; revenues of, 1914- 
1919, 295; proper proportion 
of loans and taxes in, 319; 
exports from, 1914-1919, 
328; imports into, 1914- 
1919, 329; available capital 
in, 337; extension of credit 
to Europe by, 338-345; edu- 
cation of people of, in foreign 
investments, 346; financial 
situation in, 369, 392, 405 
pre-war population, 370 
wealth, 370; income, 370 
total debt, 370; interest 
charge, 371; theory of debt 
payment in, 372 ; probable in- 
crease of expenditures, 374; 
floating' debt in, 376; sug- 
gestion to cancel debt owed 
by Allies, 383 ; made bonds 
payable in gold, 388; reduc- 
tion in debt of, 389; taxes in, 
407, 410 ; First Liberty Bond 
Act, 437-441; Second, 442- 
454; Supplement to, 454- 
457; Third, 457-463; Fourth, 
463-464; Fifth, 464-472; in- 
come tax statistics, 473, 474; 
rates of, 475-478; rates of 
excise, stamp, and special 
taxes', 1913-1919, 479-488; 
public debt of, 489-491. 

Vanderlip, Frank A., 339, 343. 
Vienna, stock exchange in,, 

closed, 28; prices in, 125; 

panic in, 126. 



509 



INDEX 



Votes of credit, in Great 
Britain, 90; in France, 93- 
94; in Germany, 100. 

Wages, movement of, in United 
States, 1913-1918, 357. 

War chest in Germany, 22. 

War excess profits tax. See 
Excess profits tax. 

War Finance Corporation, 137, 
217, 227 ; amount of loans by, 
338; suspended, 338; pro- 
visions of act relating to, 
470. 

War savings certificates, in 
United States, 228-230. 

Wealth, of leading nations, 370 ; 
yer capita, 371; redistribu- 
tion of, by taxation, 412. 

Wehrleitrag, 22, 23. 



Wells, David A., 309. 

Whisky. See Liquor, distilled. 

Wickersham, George W., 384. 

Williams. John Sharp, 265. 

Willoughby, Westel W., 89. 

Willoughby, William F., 89, 
137. 

Wilson, Woodrow, 286, 294. 

Wintermantel, Werner, 345. 

Withers, Hartley, 44. 

Wirth, G., 404. 

World War, cost of, 1, 105; 
belief that it would be short, 
51-52, 238, 245; expenditures 
for,i 82-106; wastefulness of, 
84; policy of financing, 315, 
319-325; indirect costs of, 
417; effect on racial vitality, 
418; indirect benefits from, 
419. 



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